AIQ - Alliance Healthcare

[cmakam]

The China opportunity might well be there but it playing out for AIQ and moving the meter might be the issue.

 

Have to ask what AIQ brings to the table to play in China (other than being just another company providing radiology and associated services),it might be very different from North America.If Thai Hot is the secret ingredient,they can do it without AIQ unless we believe the AIQ brand could be so sought after there.

 

I agree communicating strategy will definitely help but again if a buyback doesn't make the cut at 100M mcap,how does one believe the value in the strategy.

 

-cmakam

[siddharth18]

I'm neither long nor short but kept watching the company from a distance for a while...so please take what I say with a large grain of salt.

 

It's amazing to me how many things can go wrong that are totally out of a retail investor's control. Basically, all shareholders who bought AIQ after April 2013 are underwater...And that's kinda hard to reconcile given how the stock seemed cheap for a long time and you couldn't have a smarter capital allocator at helm (Marks).

 

Who could've seen the Oaktree exit coming, not just that they wanted to get rid of their stake, but at the price they did? Or Thai Hot's motive? What checklist or train of thought would've protected you from the outcome?

 

It's just so surreal to see almost every caller beg management for a buyback...and the management not having a clue about the margins on one of their segment or the strategy or what enhancing shareholder value actually is.

 

I actually do wonder if they even looked at the stock price before earmarking "growth capex."

 

I want to ask - what can a newbie investor learn from AIQ? Is it at all possible to avoid the disappointing outcome that befell AIQ investors?

[investor-man]

I guess it's trite to say, but this is why you diversify. That said, I'm not sure anybody was placing ERICOPOLY size bets on AIQ. This wasn't something you could see coming, and I you may even argue that it's even more of a bargain now.

[Laxputs]

Very nice to see the valuable questions asked on the Q&A, and some of the analysts grilling management for their reasoning behind their actions. I think management's answers do raise questions as to their ability in capital allocation. That said, Tomlinson has only been there 2 years and things may be starting to turn. They are growing revenues in their core radiology (pricing taking a hit to do so), and should find a balance between price and volume soon.

 

I think I have to hold on and see how the acquisitions translate to cash flow. Also, if management will start paying down debt.  Obviously buying back shares when the stock may trade at 2-3x owners earnings would be extremely accretive to shareholders.

[Laxputs]

Big sell off last two days on 4x normal volume. I don't see any news stories...

[siddharth18]

Ok this is really strange...$6.8 as I write this...how? How does something become so undesirable so quickly? Tax loss selling? Notwithstanding the management's priorities/capital allocation abilities, the underlying business is still intact performing generally as expected right?

 

 

I guess the market is desperately looking for SOME signs of life from the management...maybe a token purchase by insiders/directors just to remind the market..."Hey we see what you see and are willing to act on it"

 

BTW at what price would the Oaktree sale be canceled? As a theoretical exercise - would it have to hit $1/share for the deal to be negated?

 

 

 

 

[Packer16]

There is no cancellation price per the last CC.  Some big seller is selling.  We will see.

 

Packer

[cmakam]

From the latest AIQ 10q

 

"In addition to other covenants, the Credit Agreement places limits on the ability of the Company and its subsidiaries to declare dividends or redeem or repurchase capital stock, prepay, redeem or purchase debt, incur liens and engage in sale-leaseback transactions, make loans and investments, incur additional indebtedness, amend or otherwise alter debt and other material agreements, engage in mergers, acquisitions and asset sales, transact with affiliates and alter the business conducted by the Company and its subsidiaries."

 

Looks like a share buyback might not be too straightforward,am surprised management didnt spell out the details and explain this in the conference call.

 

Any thoughts on the rate at which AIQ might be able to rollover debt come 2019,is 7-8 percent a good estimate?

 

-cmakam

[peterareed]

I had a few posts earlier this year on the topic - but not much engagement from other posters on it.

 

Based upon my read of the credit agreement (link to original document posted below), I don't think the company has any ability to repurchase stock without violating the limitation on restricted payments covenant. If I'm correct, there is no way that there is a buyback in the forseeable future.

 

http://www.sec.gov/Archives/edgar/data/817135/000081713513000021/creditagreementimport.htm

 

 

[sae85400]

Interesting SA article... http://seekingalpha.com/article/3842076-aiq-triple-thank-chinas-slowdown

 

Lots of use of the words "speculation, rumors, etc"

 

This might be a nice entry point for those of us that don't own

 

 

[cmakam]

New CFO

http://investors.alliancehealthcareservices-us.com/phoenix.zhtml?c=129994&p=irol-newsArticle&ID=2140239

 

Given the total lack of confidence in the company's direction and the need to build credibility,one would have expected to see a CFO with listed company experience.Either CEO/BOD are clueless or dont care!!Hopefully the CFO understands what needs to be done and does it,unfortunately nothing short of results will do the convincing.

 

Why would the ex-CFO's bonus be contingent on the Thai Hot deal closing?At the end of the day it is one big shareholder selling to another.

 

For this ship to come home,looks like the captain needs to be changed too!

 

Agree with Packer,minority shareholders investing with Oaktree should study AIQ to fully understand what to expect.

 

-cmakam

[OracleofCarolina]

http://finance.yahoo.com/news/alliance-healthcare-services-reports-fourth-210500390.html

 

results for 4Q2015

 

Packer , any thoughts?

[Gamecock-YT]

Guiding for higher revenue and EBITDA but increasing debt for another year. HoHum.

[gary17]

No dividend anytime soon -  what's in it for minority shareholders ?

 

if I was the Chinese firm  I'd take advantage of the situation and do a take-under -

[Packer16]

I have dug into the 10-K and 10-Q and this definately is looking really cheap.  At this point, AIQ is generating about $25m in OCF less depreciation less NCI earnings.  With a market cap of about $70m you are at a FCF multiple of less than 3x.  The issue appears to be ThaiHot but the operations continue to do well with nice growth in Q1. 

 

Some have mentioned the issue of return on investment & this is addressed in the Proxy Statement which lays out goals (which I think are 22.7% Return on invested capital) and historical results (20.6% for investments in 2015).  There is also an incentive on return on either new investment & acquisitions which I think is in the 15% range.  I am surprised these are not more extensively discussed on the conference calls.

 

Packer

[frommi]

Is it really fcf when every million was needed to keep the bottomline flat?

[cmakam]

Their revenue last three years 2015 - $473,054K 2014 - $ 436,387K  2013  - $ 448,831K

 

Their capex last three years (in K-USD):

Equipment purchases (55,511) (32,236) (27,048)

Increase in deposits on equipment (15,751) (9,228) (193)

Acquisitions, net of cash received (49,140) (16,043)

 

Lets call it 120M,57M,40M

 

May be they have great ROI on the 250M invested,it hasnt flowed to shareholders bottomline.They have guided to pretty flat earnings for 2016.

 

In every conference call analysts have asked what is happening to the cash invested and if AIQ is buying revenue and the management has not so far provided a simple gap analysis on the puts and takes leading us to where we are (what was revenue/margin lost in MRI business etc and gained through acquisitions).

 

Also on an EV/EBIT basis I would argue valuation is not as interesting as the marketcap may indicate.EBIT has been about 65M against EV of 579M.

 

-cmakam

[Packer16]

The way I look at FCF is to use depreciation as the smoothed cap-ex number.  Cap is/has been lumpy as the CEO has stablized a sinking ship.  Although only 1 quarter the Q1 y-o-y increase in CFO less depreciation less MI earnings has increased by 14.3%.  He took over in mid-2013 and if you look at the FCF (using depreciation versus cap-ex) has increased from $5.8 m in 2013 to $24.6m TTM today.  I agree the communication of this has not been the best and the responses to your questions was given as generalities that the board looks at the return on capital but I was pleasantly surprised when I read the proxy and actually saw return on capital targets and numbers that fed into the incentive system.  Given the stablization today, I think the gap analysis makes sense & I think you can get some of that from the revenue gap analysis they provide in the releases and for Q1 it is positive.  The one disappointment I had however was all the incentive system was overridden in 2015 by the completion of the ThaiHot transaction that only benefited one shareholder versus the shareholders as a group.

 

For me a key component of going from EV/EBIT to Equity/earnings is the cost of debt.  The cost of debt is $26.2 m so the EBT is 39m, therefore, the equity to EBT is 1.8x, pretty cheap.  I also use the coverage ratio & the pricing of the debt as indicators if there is too much debt.  For 2015, the coverage ratio is close 4.3x (versus 2.5x for Radnet) and the debt is trading in the 90s so I do not see distress today and potential re-fi costs would be similar to debt costs today.

 

Packer

[cmakam]

If we look at the components of the increase between 2013 and 2015 most of it came from interest cost savings.

 

For a highly levered company using Mcap instead of EV can cause divergence.Also with AIQ the cash doesn't seem distributable,it seems to go towards debt pay down or growth capex (to keep revenue/earnings roughly flat-going by guidance on 2016 revenue).

 

Philosphically speaking,the company can take on more debt,shareprice may go down-that may make the mkt multiple even more attractive but at some point the attraction has to translate to something tangible,am thinking this would need higher EBIT/reduced debt or some combination thereof ultimately tying into EV as well.

 

-cmakam

[cmakam]

Getting more philosophical ,let us consider a company that generates 100M EBIT (keeping things simple depreciation = mcx),such a company @10X EBIT multiple would have a market cap of 1B assuming no debt.

 

Now with the same operating business,let us say the company raised debt of about a billion with interest burden of about 60M,the remaining 40M distributable to the common assuming it gets a 8X multiple would be worth 320M.The EV now is 1.32B versus the 1B without the debt.

 

Did issuing the debt make the company more valuable?

 

Why would a buyer (of the company as a whole) pay more just because the company has issued debt ?With AIQ how does the issued debt make the company more valuable than might otherwise be the case given the debt isn't anything special not available today (like lower rates on a long term debt etc)?

 

-cmakam

[Packer16]

The financial gain comes from taxes.  In the first case, taxes are 40m in the second it is 16m.  This is offset partially by the increased risk of default.  This is one reason why LBOs are so profitable if the business can service the debt load.  If they cannot, it is a zero.  If you are comfortable with AIQ's debt load then this should work out.  You also have complicating factor of Thaihot.

 

Packer

 

[cmakam]

Isn't the market efficient enough to value a dollar of EBIT available to the common sufficiently differently depending on the extent of leverage ?

 

In other words wouldn't a dollar of ebit when there is no debt have a sufficiently high multiple to account for the fact it is least risky and also reflect the fact that there is debt capacity such that EV remains roughly the same.

 

Also is issuing debt such a priced skill that whoever actually issued the debt benefits from increased EV?It seems like there would be enough people shopping for debt capacity to do this "value add":) to reduce the spread?

 

Are you implicitly assuming some kind of growth with AIQ?

 

-camakam

[Packer16]

The AT cash flow increase at low leverage levels (due to less taxes) more than overwhelms the increased risk.  It is not that the market is not efficient, it is the tradeoff between the increased cash flow and increased probability of default.  This is why LBOs and stub stocks can be very profitable investments.  Joel Grennblatt in his book You Can be Stock Market Genius describes these "stub" stock situations in Chapter 6.  In his example, he has a unlevered stock trading a $36 (12x earnings) that decides to borrow $30 and distribute the proceeds to shareholders.  He states the stock would typically sell for $10 (8.3x earnings) thus creating $4 in additional value in the process.

 

Typically, the stub has low interest coverage but if the company can generate enough cash flow the coverage can increase rapidly.  In this case you have a large amount of coverage, rare for a "stub" situation and thus safety combined with a call option type pay-off on the upside.  The key here is getting comfortable with Thai Hot as this company is being priced a Chinese company not a US one.

 

Packer

[cmakam]

Thanks Packer...

 

IF  they can grow EBIT the common could be a home run (provided ofcourse Thaihot doesnt spoil the party).

 

Would be very different if there was a strategist driving this whole thing (like Bollenbach in the Mariott case in you can be a stock market genius) but with AIQ feel like management happened to be there for the ride and the ship goes where it goes.Also it would be in their interest to keep Thaihot happy.

 

With and without Oaktree the thesis in some ways feels different while the underlying business remains same.

 

-cmakam

 

[A Dhandho Investor]

Q2 results seemed to be in line with the Q1 results:

 

http://investors.alliancehealthcareservices-us.com/phoenix.zhtml?c=129994&p=irol-newsArticle&ID=2193184