On today’s Breakouts report, there are 11 stocks on the positive breakouts list (stocks with positive price momentum), and 48 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that has rallied over 60 per cent year-to-date but has not appeared on the breakouts report given its low market capitalization (below the screening threshold).
On Tuesday, its share price plunged 14 per cent on high volume after the company announced a bought deal financing with an offering price significantly below the previous day’s closing price.
Given this correction, this is a stock that investors may want to put on their radar screens, especially as heightened volatility reduces the stock’s valuation. The stock has a unanimous buy recommendation from four analysts with an anticipated one-year return of 37 per cent.
The company discussed today is Vitalhub Corp. (VHI-X).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based Vitalhub provides healthcare information systems. Its digital product offerings include patient flow management and electronic health records.
In terms of its revenue breakdown, the company has three main segments. During the second-quarter, 67.3 per cent of revenue stemmed from term licenses, maintenance and support (recurring revenue), 27.3 per cent was from services and other, and approximately 5.46 per cent stemmed from perpetual licenses.
Acquisition growth is one of management’s key objectives.
Management seeks to acquire companies that are either breakeven or profitable, have annual revenue of between $1-million and $12-million, and recurring revenue exceeding 60 per cent of total revenue. Management targets paying a multiple of between 1 and 2.5 times revenue.
The company has completed eight acquisitions in his history. Last month, it acquired Transforming Systems Ltd., which collects data and provides analysis and forecasts to health and social care providers. In August, the company acquired InTouch With Health Ltd., whose platform includes patient flow and pre-operative assessments.
To fund its growth, management has come to market - repeatedly.
On Oct. 26, the company announced a bought deal financing, offering over 5 million shares at a price of $2.90 per share for gross proceeds of approximately $15-million. In March, the company completed bought deal financing, offering over 8.5 million shares at a price of $1.80 per share for gross proceeds of roughly $15.3-million.
Investment thesis highlights
- Seasoned management team. Vitalhub’s President and Chief Executive Officer Dan Matlow is the former president and chief executive officer of Medworxx Solutions Inc., a Toronto-based patient flow software provider that was sold to Aptean Inc. in 2015.
- Growth. Management aims to deliver both organic (internal) and acquisition growth in a fragmented market.
- Rising recurring revenue. For the first six months of 2020, revenue from term licenses, maintenance and support (recurring revenue) represented roughly two-thirds of total revenue, up from approximately 47 per cent during the first half of 2019.
- Higher ACV: A key objective by management is to increase the ACV (annualized contract value) of recurring revenue. The ACV of recurring revenue was $7.49-million at quarter-end, up 29 per cent from $5.3-million reported last year.
- Insider ownership. Director Francis Shen’s company, Connection 25 Inc., owns over 10 per cent of the shares outstanding. Mr. Shen was the founder and former co-chief executive officer of Aastra Technologies Ltd., a company that was sold to Mitel Networks Corp. in Jan. 2014.
Quarterly earnings
On Aug. 11, the company reported better-than-expected second-quarter financial results. Revenue came in at $2.7-million, down 3 per cent year-over-year, but surpassing the consensus estimate of $2.5-million.
It said in MD&A (Management’s Discussion and Analysis) document, 'Work stoppages and delays on some projects due to the COVID19 pandemic. Hospitals and their staff are focused on dealing with the pandemic and our staff cannot go on site, hospitals have been focused on dealing with the virus vs. looking at new business."
The gross profit margin was 73 per cent, relatively flat year over-year (73.8 per cent last year). Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $754,262, up 37 per cent year-over-year, handily beating the Street’s forecast of 219,000. The company was profitable, reporting net income of $179,467, compared to an earnings loss of $212,035 reported during the same period last year. Earnings per share came in at a penny.
In the earnings release, Mr. Matlow said, “As anticipated we saw a slowdown in new sales as a result of the focus of our clients on the COVID-19 pandemic. The strong percentage of recurring revenue along with implementation services allowed us to achieve revenues comparable with the prior quarter and outperform our bottom-line expectations. We are also starting to see the positive results of our acquisition integration efforts from a cost-reduction perspective. This combined with some government assistance programs has led to strong earnings for the quarter. Moreover, we continue to progress and advance our M&A [mergers and acquisitions] strategy, which has become increasingly active since the onset of the pandemic, amid a robust environment for prospective acquisitions. Our existing customers and future prospects are getting back to refocusing on new initiatives as healthcare systems around the world reopen with newfound experience and insight into the importance and necessity of digital health solutions. We expect to benefit from this as we move forward.”
The company is expected to release its third-quarter in late November. A reporting date has not been announced yet.
The consensus revenue, EBITDA and earnings per share estimates are $3.3-million, $0.5-million, and breakeven earnings per share.
Dividend policy
The company does not pay its shareholders a dividend.
Analysts' recommendations
This micro-cap stock with a market capitalization of $76-million is covered by four analysts, and all have “buy” recommendations.
The firms providing analyst coverage on the company are: Beacon Securities, Cormark Securities, Eight Capital, and Paradigm Capital.
Revised recommendations
Thus far in October, two analysts have revised their expectations higher.
- Beacon Securities' Gabriel Leung increased his target price to $4 from $3.25.
- Cormark Securities' Gavin Fairweather raised his target price to $4 from $3.
Financial forecasts
The Street is forecasting revenue of $13.50-million in 2020, $20.5-million in 2021, and $22.9-million in 2022. The consensus EBITDA estimates are $2.2-million in 2020, $4.2-million in 2021, and $6.2-million in 2022. The Street is anticipating an earnings loss of 1 cent per share in 2020, but turning positive thereafter. The consensus earnings per share estimates are 6 cents in 2021 and 12 cents in 2022.
Earnings expectations have increased in recent months. To illustrate, three months ago, the Street was anticipating revenue of $10.9-million in 2020 and $14-million in 2021. The consensus EBITDA estimates were $1.05 for 2020 and $2.90 for 2021. The Street was anticipating an earnings loss of 4 cents per share in 2020 and earnings per share of 2 cents in 2021.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-sales multiple of 3 times the fiscal 2021 consensus estimate.
The average one-year target price is $3.91, implying the share price has 37 per cent upside potential over the next 12 months. Individual target prices are as follows in numerical order: $3.50, two at $4, and $4.15.
Insider transaction activities
On Aug. 25, director Francis Shen, with an ownership position exceeding 10 per cent, purchased 101,200 shares at a price per share of $2.0995 for an account in which he has indirect ownership (Connection 25 Inc.). The prior day, Mr. Shen acquired 43,200 shares at a cost per share of $2.0716 for this account.
Chart watch
The stock began trading on the TSX Venture Exchange in December 2016 so trading data is limited.
Year-to-date, the share price has rallied 63 per cent.
On Tuesday, the stock was slammed with the share price plunging 14 per cent on high volume. Over 717,000 shares traded, well above the three-month historical daily average trading volume is roughly 91,000 shares.
In terms of key resistance and support levels, the share price has a ceiling of resistance between $3.20 and $3.35. Looking at the downside, there is initial technical support around $2.75. Failing that, there is strong support around $2.50, close to its 50-day moving average (at $2.40).
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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Jennifer Dowty