AIQ - Alliance Healthcare

[jawn619]

I've been looking at Fonar lately. Looks like they are stealing market share. I saw earlier in the thread someone mentioned they were a weak  competitor. Is anyone worried by Fonar's unique design and recent move to become a facility operator to expand Fonar's market share personally. Lot of white papers supporting Fonar giving better/clearer results and providing a better overall value (can do more procedures?).

 

Hey Schwab, I've taken a look at FONR before and it looked compelling from a valuation standpoint. A couple things to note, the founder has a controlling interest and is an interesting character. He literally invented the MRI and was supposed to win a nobel prize but was likely denied because of his creationist beliefs.

 

https://en.wikipedia.org/wiki/Raymond_Vahan_Damadian

 

Also it has some patent history. They were able to successfully defend their patent against GE but I'm not well versed with patents and how long their competitive advantage can last.

[Packer16]

AIQ signs long term contracts with hospitals for MRI usage so I think the impact would be smaller than to independent MRI clinics like Radnet.  AIQ has developed and keeps up the hospital referral network as a core of what they do.

 

Packer

[kab60]

I have a hard time wrapping my head around this company. They have generated free cash flows of 3 times their current marketcap during the last ten years, but where has it gone? Revenues are where they were in 2005, debt seems to have gone up (at least during the last 5). It's 'cheap' on a number of metrics (I also bought a small position before but sold at 24 because I wasn't sure I'd hold on in a downturn and would like them to pay down debt), I just can't figure what has happened to all that cash. At a quick glance it seems like they used 10 years of free cash flows to remain at status quo. I'm obviously overlooking something, so please point it out. :)

[Packer16]

This company changed management in late 2013 to change this situation.  It replaced a doctor with a operations CEO who built up health care services firms in the past for sales to larger players.  They have rationalized the mobile MRI units.  In 2014, they reduced did reduce debt and purchased the pain management platform.  If management can get close to the mid-point of their guidance, the turnaround will show up in there numbers.  They have been trending down for the past 3 years, with this year "scheduled" to be a turn around year.  We will see.  If this does not turn, I trust Oaktree will do something to generate a return for them.

 

Packer 

[Phaceliacapital]

Would you be invested without Oaktree's involvement?

[Packer16]

It would have to a have a higher expected return but since they own the equity versus the debt and the debt trades near par, I think they provide some downside protection along with being aligned with other shareholders.

 

Packer

[plato1976]

Keep dropping like a stone

is it due to the rate hike concern?

 

It would have to a have a higher expected return but since they own the equity versus the debt and the debt trades near par, I think they provide some downside protection along with being aligned with other shareholders.

 

Packer

[Andy Dufresne]

I do not know Plato, but LIBOR would need to rise above 1% from its current state in order to trigger their LIBOR hedges that go out beyond this year if memory serves me right.

 

Any ideas on the cause of the price decrease are welcome

[Laxputs]

Trying to model how a change in interest rates affects their coverage.

 

Debt Details:

250m LIBOR capped at 2.5%

255m debt (uncapped in regards to LIBOR?)

30m LIBOR + 3.35%

 

Seems in total they are paying around 4.7%, including the costs of their hedges.  The debt details do not make modelling interest rate changes very easy.

 

But say rates go up 1.5%: 545m * 6.2% = 33.8m interest.

 

140m EBITDA / 33.8m INTEREST = 4x coverage.

 

They have a leverage ratio covenant of 4.85:1.  By my numbers I see them at 3.9. They don't have a covenant on interest coverage ratio anymore.

 

And debt should going down from this point.

 

Though there is a lot of debt, it seems it is manageable even if interest rates rise. And they have their hedges.

 

Thoughts?

 

 

 

 

 

 

[tombgrt]

Looks at least ballpark correct to me Laxputs. There is no reasonable level of interest rate change where it kills the company imo as long as they hit the mid point of their guidance. Oaktree is also not just going to sit idle if the company goes south. I'm confident they have their finger on the pulse.

 

Should also not forgot that this stock is barely followed and has very little analyst coverage. Unless I find other reasons for the stock price drop, I'll hold and occasionally add (like yesterday). It's definitely my worst performer and at 20% cost basis (average at $19 now) it sure hurts what is otherwise a good year. ;(

[Philip Morris IV]

To add to tombgrt, it could be indiscriminate selling.  Around 200 small-cap and index mutual funds hold about 40% of the share float here, and it is down -30% YTD and -48% TTM.  The psychology of mutual funds is to sell losers.  With ~$250-500k of trading volume per day and mostly sub-1000 lot trades, realistically they have to spread their selling out over time.

[tombgrt]

http://phx.corporate-ir.net/phoenix.zhtml?c=129994&p=irol-newsArticle&ID=2076806

 

Q2 results out.

[Gamecock-YT]

If you back out the The Pain Center revenue they almost were even revenue wise year over year. But the decline in radiology pricing pressure increase $800k vs Q1. Conference call is to start at the top of the hour.

[Laxputs]

Q2 2015:

 

SSS up in all segments vs Q1.

Volume of scans up in all areas vs PYP but pricing pressure continues in radiology, decreasing revenue and EBITDA in MRI and PET/CT.

Reaffirmed all guidance.

Plan is to keep making JV partnerships, pursuing lots of available new revenue.

Cost savings of 2.8m(?) enacted with a total of 5m in sight.

 

Valuation

Currently they are trading at 5.7x TTTM 130m adjusted EBITDA.

6.5x 2015's projected ~138m EBITDA yields 334m M-Cap, or about 100% appreciation potential. If you think the market gives them that once 2015 results are out, that's 200% IRR from today.

Likely 40m-50m of Owner Earnings. At current 15.40$ share price, that's 3x-4x for a growing company with good management.

While an owner waits for fair value, the IV is increasing with accretive growth, new revenue. IV increases, MOS increases. Oaktree at the helm.

 

One analyst on call.

 

I'm 5.5% allocated. The lack of a concrete floor from cash flows or asset based protection and their debt load would keep me from a large position in AIQ.

 

Question: When doing a FCF calculation on AIQ, how much are you backing out for MI on an annualized basis given there was 4.9m Q2 2015, 19.6m?

[Homestead31]

hi - i'm new to the story here....  first, just wanted to point out that the Journal of the American Medical Association (JAMA) Oncology just released a new study suggesting that fewer courses of higher dosage radiation therapy is better for breast cancer patients.  as with all things in medicine there will likely be many more studies to come and there is probably no "right" answer, but fewer treatments likely means less profit for companies like AIQ.

 

second - as i understand it, the MRI business has basically been commoditized and the economics have been competed away by the OEM guys who make financing available so that every tom dick and harry can have their own MRI machine...  my question is, why won't the same be true for the radiation oncology business?  i see that the company has a service offering which they pitch as a differentiator, but this claim seems thin to me... 

 

given the leverage here it seems that the oncology business really needs to take off...  any and all thoughts appreciated!

[Laxputs]

Good post. Thanks for the comments. It's posts like these that make me question how much I actually know about my holdings.

 

1. If fewer treatments of rad therapy for breast cancer becomes common place, how will that affect AIQ's bottom line? Will all treatments be reduced across all ailments? I'm not sure how much impact it may cause AIQ.

 

2. In regards to hospitals outsourcing patient care services versus keeping it in-house, here's what AIQ thinks on the topic: it is often requested by physicians to partner with a company due to the expertise of the operator, the cost savings of the efficient operator, and to smoothly add a new and less familiar service line. 1/3 of imaging sites/hospitals are looking to upgrade their equipment in the next three years and AIQ stands to acquire some of that with their active sales team.  As far as I can tell, they aren't losing contracts and partnerships, they were trimming unprofitable accounts, taking some accounts from competitors, but showing revenue declines from pricing pressure.

 

The long term contracts lets them give reasonably accurate guidance on revenue and margins and then it's just risk/reward based on a fair valuation of the company's cash flows after servicing their large debt and the time frame to get there.

 

Cause for concerns seems the pricing pressure. Does pricing ever come back up? Would that take less competition in the space to increase prices? Who drops from the competitive landscape first? I'm not sure. Admittedly, these are things I should know.

 

But the company seems well managed, is growing RO nicely, sees lots more profitable growth and partnerships in the near future and says they will pay down debt when the return looks better than growing. By my math they are guiding to about 44m Owner's Earnings, making today's 14.60$ share price a 3.7x multiple. It's priced to be going out of business. I don't think they are going out of business.

 

 

[Homestead31]

By my math they are guiding to about 44m Owner's Earnings, making today's 14.60$ share price a 3.7x multiple. It's priced to be going out of business. I don't think they are going out of business.

 

Hi - still doing work here, and still hoping to understand why the "better business" ie the oncology unit won't be commoditized just like the MRI business has been.

 

I understand that 1/3 of the MRIs are estimated to be replaced in the coming years, and i understand that AIQ thinks they will win some of that business, but its not at all clear to me that that business is even worth winning as it seems to be completely commoditized and subject to serious pricing pressure b/c the OEMs are basically giving away machines to anyone that wants one, and doctors want them b/c then they can order more tests and make more money w/o a middle man.  to me this business with this amount of leverage is deserving a low multiple b/c the great recession proved that MRI scans are greatly affected by economic conditions, and if MRI is doing the heavy lifting in terms of cash flows, this business could be in real trouble if the economy really slows/china blows up/etc etc.

 

where it gets interesting however in my mind is the attempt to move into Oncology, which is certainly less economically sensitive, wins longer term contracts, and is seemingly not yet saturated the way the MRI market is.  if all the cash from the MRI business is funneled into growing the Oncology business, and the Oncology business won't be competed away like the MRI business has been, this investment could be a home run b/c the oncology business can support more leverage than the MRI business. 

 

the problem of course is bridging from the time when the MRI business is the main business and the time when Oncology will have grown enough so that Oncology is the main business.  If Oncology is subject to the same forces that ruined MRI (ie cheap vendor finance and a flooding of the market) then that bridge may never be crossed.

 

If anyone knows more about the oncology market, please share!

[Packer16]

I think in the MRI I business you are missing the long-term contracts they have with hospitals and the differential in re-imbursement from hospitals to others.  Hospitals have re-imbursement rates in multiples of that of independents.  That is the reason that AIQ has such high MRI margins versus comps.  You do not get the types of margins AIQ gets in MRI in a commodity market.  Radiology is one of the highest profit centers in hospitals in part due to the high re-imbursement rates.  Independents have been purchased by hospital groups to obtain this re-imbursement and have become much more profitable than the independents.  The issue with non-hospital MRI is more with Radnet who does not have theses relationships.

 

I think if you look at oncology comps (American Shared Hospital Service) they appear to be making 50% + EBITDA margins so this business appears to offer higher margins than even AIQ's MRI business, the 30% margins.  In addition, the LT contracts prevents much of the price erosion as AIQ is more of a LT financer of the equipment versus a direct price taker in the market.

 

Packer

[Homestead31]

thanks for your insight Packer.  I haven't started work on RDNT yet and didn't realize the rate differential.

 

sticking w/ the radiology side of the business, it is still not clear to me how AIQ adds value.  looking at conference calls where they claim to add value through better scheduling abilities and utilization seems like a stretch to me, although i would very much like to know why i am wrong as i do like this idea on some levels. 

 

when i think of radiology, i think of mostly 1 off appointments w/ little room for profit on the consumables associated w/ an appointment. 

 

in other words, if you think about a company like DVA, patients for the most part are strictly scheduled - same day, same time, week after week so efficiency is a real opportunity.  Additionally, DVA has economies of scale so can buy epogen and other consumables at better prices, and widen margins there. 

 

or if you think about HLS, patients stay in their facilities for more than 2 weeks at a time, so it seems like there is more opportunity to share best practices across the network to help bring margins down at the unit level, and the units are free standing, allowing them draw from multiple area hospitals and thus increase utilization.

 

at this point in my research it is hard for me to understand where the value add comes in the MRI world due to my perception of its one off nature.  am i wrong on the one off thing?  and i am wrong in my belief that they do not increase utilization by pulling from multiple facilities? I am working on these answers independently of course, but would appreciate any knowledge from the board!

 

additionally, they talk about service etc, but there are companies based in India that will read and interpret MRI data w/ US trained doctors for what i assume would be a fraction of the cost.

 

thanks again for all thoughts!

[Packer16]

MRI is one off if you are doctor but a hospital has a steady stream of patients thus they recurring revenue.  There is a recurring stream here but not to the same extent as Davita.

 

Packer

[tombgrt]

The joys of owning small caps.... Valuation compared to Radnet makes absolutely no sense. I have to admit it's getting annoying.

[Andy Dufresne]

Agreed. However I've noticed that I make bad decisions when I allow any emotion, being annoyed included, to affect what we know to be the rational value of the company.

 

What is worse, at least you can sip on some of the world's finest beers to take away this feeling of being annoyed ... some Leffe Radieuse, Forbidden Fruit or La Chouffe  :o

[Libs]

As a fellow suffering shareholder (basis $24), let me toss out a few things no one wants to hear, least of all myself.

 

>Please read this in context: I am new to the concept of EV / EBITDA investing, am about to (re) read Packer's thread as recommended, and consider many of the posters here as very helpful and smart. I appreciate the bull case here. I also know virtually nothing about this business other than what I've gathered from about 15 hours' research.>

 

Radnet

 

Radnet is growing faster, has a history of at least some GAAP profitability, has grown EBITDA consistently,  and is consolidating mom and pops at 3-4 X EBITDA. They have contracts too, at an average of 5 years.

 

All of this I got from a perfunctory look. Throw in their liquidity and promo skills ( their story sounds pretty good)....and it's no wonder they are valued higher.

 

Radnet is probably overpriced, but who cares anyway?

 

Meanwhile in AIQ - land:

 

1) They face industry headwinds ( we are viewed as a commodity and if you look at industry outlook papers, pricing pressure will continue on the MRI side for sure),

 

2) Revenue and EBITDA have been stagnant for years;

 

3) OEM's are eating into our business with high volume clients,

 

4) AIQ will break covenants if EBITDA drops below $100MM,

 

5) Is in a high fixed-cost business, leaving little flexibility if revenues drop;

 

6) All of this played out in a quarter where MRI pricing dropped from $340 to $316 Y/Y, with volumes down 3%, and RET / CT pricing dropped from $950 to $890, with volumes up 2%.

 

Pretty easy to make a bear case, no?

 

There's no reason the market can't look at AIQ and say, well it's in a tough business with a lot of debt, it's worth maybe 10 X earnings. Which would be $8-$10.

 

In summary: I get the EV / EBITDA math and how this is a triple if it goes right. But there's a reason it's at $13 and no reason it can't go to $8.

 

 

 

 

 

 

 

[Packer16]

You have to remember that there are headwinds but these guys are still making industry high EBITDA margins and expect the bottom to occur this year.  We are still seeing independent clinic transactions at 7x EBITDA.  The possibility of hitting anywhere near $100 million in EBITDA is near 0 IMO.  The company is now trying to expand in pain management which is cap light and is suppose to take up the decline in the MRI business.  The bear case IMO is there is no growth and Oaktree sells at premium to today's prices.  We will see.

 

Packer

[Libs]

You have to remember that there are headwinds but these guys are still making industry high EBITDA margins and expect the bottom to occur this year.  We are still seeing independent clinic transactions at 7x EBITDA.  The possibility of hitting anywhere near $100 million in EBITDA is near 0 IMO.  The company is now trying to expand in pain management which is cap light and is suppose to take up the decline in the MRI business.  The bear case IMO is there is no growth and Oaktree sells at premium to today's prices.  We will see.

 

Packer

 

Thank you Packer, you are right, AIQ's EBITDA margins are double that of RDNT. I hadn't noticed that.

 

May I ask a question ( of anyone)  about how to think about EV / EBITDA. I'm a total noob at this; I've been held back by Munger and Buffett's rather caustic comments on EBITDA.

 

My question involves how to think about the value of the equity as debt drops.

 

Let's use these numbers for AIQ:

 

Common $140MM

Debt $500MM

EV $640MM

EBITDA $125MM

 

So EV / EBITDA = 5.12

 

Now fast forward a few years, and let's say the debt is all paid off, and everything else is the same:

 

Common 140MM

Debt 0

EV 140MM

EBITDA $125MM

 

EV / EBITDA = 1.1

 

The 1.1 multiple makes no sense, right?  But on the other hand, the common would have to rise to 640 MM to keep the EV/ EBITDA ratio at 5.

 

 

That's a 4.5 bagger which makes no sense either ( after all, the earnings / FCF from the company would not be that much higher in example 2).

 

Help..I'm trapped in the mindset of P/E or P/FCF multiples and get get my head around this.

 

TIA