From today on I build a 3% long position in SHL Telemedicine (SHL) with a limit price of CHF 6.8 per share.
SHL’s share price came under pressure after the collapse of a takeover attempt by a Chinese investor at the end of last year.
The company has currently an enterprise value of USD 78 m and I expect SHL generated USD 43 m of revenue and an EBITDA of USD 9 m in 2015.
SHL provides remote diagnosis and monitoring services for heart and lung patients suffering from chronic heart failure (CHF) and chronic obstructive pulmonary disease (COPD).
More than 25 years ago, the company started its services in Israel where it is now the market leader serving 70,000 patients generating revenue of USD 23 m and 20% operating margins. With low single digit growth rates and strong cash generation in Israel, management has been focused on entering other markets to capitalize on their expertise gained in Israel.
In Germany the company bought two competitors over the last two years. Both acquisitions fit very well in SHL’s existing presence in Germany, have been accretive to income shortly after acquisition and it seems that management did not overpay. In 2015, I expect Germany generated close to 50% of total revenue with operating margins approaching the level of SHL’s home market.
Apart from Germany, the company has been investing in the distribution channel to establish a presence for their products in the US and Asia. Since 2013 the company has invested substantial amounts without benefiting from an increase in revenue or income so far. It remains to be seen whether these investments will pay off going forward. However, excluding the negative contribution to operating income from this expansion, the positive incremental effect on EBITDA should be at least USD 3 m for 2015. As a consequence, on a consolidated basis the company’s true earnings power seems to be understated.
I think that combined with the recent sell off after the unsuccessful takeover attempt this provides the opportunity to buy a share in the company at a very reasonable valuation (6.5 times EBITDA adjusted for US/Asia expansion costs).
After this brief introduction, I will soon come back with a more detailed analysis in a second post.
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