Ann: UHS NHS Foundation Trust procures Miya Precision for EPR, page-20

Having followed the company for several years, I acquired its stock in early 2021, saw the share price promptly double in the next 6 months, to be back at the starting point 6 months later.

I think that I, like the overall market seemingly, made an investing mistake with this business by underestimating the sales lead times and hence, the cost of customer acquisition.

Importantly, this realisation didn't break the investment thesis for me.

Sure, the sales cycle was turning out to be more protracted than I had expected, but that meant just a delay in the timing of the shareholder value crystalisation; the fact remained that once on-boarded, customers would find it very hard to dislodge themselves (assuming the ALC service and product offerings are all they are cracked up to be, which is now self-evidently the case, based on the contract wins they have achieved).  

There has been some high-profile customer reference-ability of ALC's products and/services, so in my mind, the ultimate prize had not ceased to exist, its just that the time to access the prize was more drawn out than I had expected.  (Understandably given the nature of health care, hospital administrators are risk-averse and resistant to changing the way they do things.  Everyone knows that, but it has still been a grind for ALC to penetrate the market at scale.)

But what did cause me to sell my shares was what I thought was an ill-considered and poorly-structured equity issuance exercise in December last year, which was highly dilutive to existing shareholders and which I thought was going to leave a significant overhang of stock for months to come.

I'll never know if my thinking was ultimately right because, while the stock price more than halved in the subsequent six months, this was almost certainly driven by the rising interest-rate driven crunched in technology stocks.  So I got it right, but for the wrong reasons.

But I'm sure that the inevitable selling of some of the newly-minted stock from the Dec 2021 capital raising, that ended up in hot hands of investors who weren't natural long-term shareholders, added to the share price pressure during the buyers' strike between March and June this year.

Anyway, whatever the determinants of the share price path in 2022 is moot; all I know is that the somewhat indiscriminate (and almost panicky) selling in the early part of the year offered the opportunity for me to re-establish a new shareholding at significantly discounted prices.

I don't mind saying I was bemused in 2021 when ALC was capitalised in the market at $300m and I baulked when ALC was valued at $500m at one stage.  By comparison the company's market cap today is $200m.

But that's not comparing apples to apples, because today's valuation includes the not-immaterial Silverlink business - for which I think ALC paid more than $50m, I recall.

So, like-for-like, ALC's market cap today - adjusted for Silverlink and assuming a fair price was paid for Silverlink (which is not necessarily a given, but let's assume for the sake of discussion) - is more like $150m, compared to the $300m (and $500m!) heights reached in 2021

Of course, that's all looking in the rear-view mirror; the question is how appropriate today's ALC valuation is.

That's where it gets hard because it involves making financial forecasts, something that is very difficult to do with any real accuracy.

But it doesn't mean we should try because making money out of investing doesn't require getting everything 100% right; rather, all it requires is getting most things just approximately right.

In ALC's case what I eighteen months ago thought was approximately right, remains the case today, namely that this is a business the has the intellectual property, internal resources and established customer beachheads to be exiting FY2025 at:

-  $65m to $70m in Revenue run-rate (implying a CAGR of 18%-20%pa),  
-   continued generation of 86% to 88% GP Margins, and supported by
-  $40m to $45m CoDB (cf. <$30m currently, so relatively generous 45%-50% uplift over the next 3 years)


The scenarios (Low, Mid and High) that arise from the matrix of those assumptions looks as follows:





As is the case with these sorts of long range forecasting exercises the range of outcomes is rather wide, but for what its worth, at the mid-points we'd be looking at ~$15m  in EBITDA and ~$10m in EBIT.

Those are immaterial numbers.

However, the really tricky part of the exercise is to form a reasonable view of what sort of valuation multiples the market will ascribe to those sorts of financial metrics.

My view is that those earnings will have a premium pedigree (strong macro-tailwinds, low counter-party risk, high Gross Profit margins, steady, sticky and reliable cash flows with limited ongoing calls on capital to support them, i.e. fat margins + low capital intensity = very high return on capital).

So I think that the market will ultimately ascribe high valuation multiples (in the mid teens for EV/EBITDA and approaching 20x EV/EBIT ) for ALC.

However, I'm not sure the market will have started to apply those sorts multiples by as soon as 2025; it often takes several years for the market to acknowledge the true pedigree of high-quality earnings.  

I think the market will by 2025 be happy to say, "Give it low teens EV/EBITDA (say, 12x to 13x) and high teens EV/EBIT (say, 16x to 18x)".

On the Low, Mid and High scenarios above, this equates to Enterprise Values of, respectively, $120m, $190m and $260m.  (Wide range, obviously, but - again -that's the nature of the beast when it comes to looking out so far ahead).

The current EV is around $200m , so the market is effectively pricing in the Mid scenario
(shouldn't be overly surprising; the market is often right about things).


So I think that to make money out of the stock from the current $200m EV level, one would need to either be willing to:

1.)  think that the ultimate level of Revenue and Earnings of the company (ie., the profitability before it goes ex-growth) will be a lot higher beyond FY2025;  or

2.)  assume that the market will afford even higher valuation multiples to the near-to medium-term earnings than applied in the exercise above.


Personally, I'm loathe to do the latter, because I think that its risky to assume meaningful re-ratings are definitely going to happen.  

However, I am happy to play the game of "terminal earnings":

I think that this company can, by organic growth means, reach Revenues well in excess of $100m without too much need to invest aggressively in CoDB.   By way of example, at Revenue of $120m, that works out to over $100m in Gross Profit (so 2x EV/Gross Profit, which is cheap).

Assume, conservatively, CoDB of $60m, and we're talking about in excess of $40m in EBITDA and $30m in EBIT.  

That describes P&L of a of a serious business, one which will be on everyone's radar, so full re-rating is highly likely.

So, now capitalising those financials at, say 15x-17x EBITDA and 20x-22x EV/EBIT, and we get an Enterprise Value approaching $700m (equivalent to a share price of 55cps, assuming the capital structure remains unchanged).


So that's the blue sky which would make it worthy of remaining invested for the longer term, because even it it takes 5 years to get there, it works out to a compound annual investment return of 25%pa which is attractive, even on a risk-adjusted basis.

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