AHC - Apollo Health Corp

[Monsieur_dee]

I'm newer to investing FWIW. I'm not very smart & I mostly clone smart investors but from time to time I get ahead of myself & make a 5% bet. Not an original idea stole from. 

https://www.valueinvestorsclub.com/idea/APOLLO_HEALTHCARE_CORP/5500096221#description

https://amp.reddit.com/r/CanadianInvestor/comments/kcjqwh/deep_dive_into_apollo_healthcare_ahcto_the/

I'm not going to go into great detail. Two write up's do a good job of analyzing the business. Some people will think I'm crazy because stock has 10x in last year & because I'm linking a reddit page. Will just do a bit of update. This reminds me of what Charlie calls the 'cancer cutting approach'. Write-ups with more info on that. 

Apollo health corp is a manufacturer of private label health and beauty products. Businesses was already turning around pre-covid (look at 2018-19 financials) under the 'new management' Their number one selling product and highest margin product has been hand sanitizer. The market is pricing ahc like a one time boost from covid. This is essentially a bet that hand sanitizer will still be in demand after covid & the relationships with customers apollo has created in last year (some will fade) will continue on. 

Management has used cash flow in last year to pay off all debt & in last quarter did 30m of fcf. Annualized ev/fcf <4. Ev/EBITDA < 4. The ltm earnings are 'covid boosted' so I'm guessing worst case scenario ntm fcf of 60 m. (this assumes entire business gets cut in half because 'covid is over') which puts as at ev/fcf & ev/EBITDA at <6.

With no debt (except capital leases) they should do 80-120 in fcf ntm. I am expecting a cash dividend or more buybacks. Am also hoping for a multiple re-rating as the market appreciates the constant earnings over next year or two. 

Risk is if management tries to make a dumb acquisition with the money which they have not shown they are capable of. And of course if sales plummet after pandemic. 

I welcome criticism. 

[wabuffo]

I think you have to be careful for two reasons.

- the current run rate is unsustainable and is more a one-timer due to the pandemic and the unusual consumer demand.

- its not a branded business like P&G, Dial, etc.  It is a private label contract manufacturer and thus the retailers (and branded companies who outsource to it) will never allow it to earn large profits. 

I don't think this is a high-quality business.  I'd be very careful.  Though to be fair, I haven't looked at it in awhile.

wabuffo

 

Edited April 11, 2021 by wabuffo

[Monsieur_dee]

Thank you

[LearningMachine]

1 hour ago, wabuffo said:

I think you have to be careful for two reasons.

- the current run rate is unsustainable and is more a one-timer due to the pandemic and the unusual consumer demand.

- its not a branded business like P&G, Dial, etc.  It is a private label contract manufacturer and thus the retailers (and branded companies who outsource to it) will never allow it to earn large profits. 

I don't think this is a high-quality business.  I'd be very careful.  Though to be fair, I haven't looked at it in awhile.

wabuffo

 

Agreed, it is a price-taker not a price-setter. 

[dbm]

I did take a look at AHC a couple of months ago, but decided to pass because I have no idea what the sustainable run rate of fcf will be.

The problem is not only what will be its sustainable revenues (50% less revenues as in your worst case seems too conservative), but its sustainable gross margin. I agree that the new, but old, management was already doing a good turnaround job before covid. But at the end of 2019, they were having 20% to 25% gross margins, compared to 40% to 50% currently. If you consider this level of before covid margins in your model, your worst case scenario could be much worse. Hard to imagine a private label business being able to sustain 50% GM. Reality may be somewhere in between. 

Given its scale seems far larger than its competitors, with low level of maintenance capex and negligible tax expenses, a low multiple (5x?) of recurring EBITDA may be a good entry point. Unfortunately that recurring EBITDA is a mystery to me (and probably even to its CEO). 

 

 

[deleuze68]

As the author of the Reddit piece, I'd just like to add a couple of notes.

1) I agree regarding gross margins and revenue going forward being large unknowns. And would classify these as serious risks a year ago. But today the company is debt free and printing cash. With each passing day, downside is minimized. 

2) With respect to price-setter vs price-taker, the big box stores are becoming more and more the price setters leading both branded and private label to be the price takers. Private label adaptation, including beauty and healthcare products, is becoming more fashionable, and has plenty of room to run (see Europe). Customers receive similar quality for a reduced price and the stores achieve greater gross margins. And as acceptance increases the private label itself achieves branding status (e.g. Kirkland). The big loser in all of this is the entire marketing complex with all that money now funnelled into the pockets of the the big box stores and their customers. Apollo is in prime position to take advantage of this gradual shift, and could actually become a price-setter within the private label industry due to their R&D and fulfillment capabilities.

Edited April 12, 2021 by deleuze68

[Cayce]

I remember reading somewhere that pre-pandemic, their "state-of-the-art" facility was only operating at ~50% capacity.  And my understanding was that this is why they were able to increase margins by so much; all they had to do was start using more of their facility when the pandemic hit. 

I am really curious to learn more about their facility, but haven't been able to do so.  Has anyone been able to dig up more information on their facility?

It seems like they are going to come out of this pandemic with a lot of cash.  It's going to be interesting to see what the Wachsberg Brothers decide to do with the extra cash now that they've already paid off their debt.