KeyStone’s Your Stock Our Take: VitalHub Corp. (VHI:TSX-V)
This week we briefly answer a listener question in our Your Stock Our Take Segment but in the light of the significant global market drop, we will focus on issues surrounding 1) Covid-19, 2) Drop in oil – Canadian energy producers generally, 3) Fear in the markets, and 4) How do deal with it in your 15-25 stock portofolio.
In our Your Stock Our Take Segment, our question is on VitalHub Corp. (VHI:TSX-V) is which develops mobile healthcare solutions that allow clinicians to access information about patients. Its technologies include blockchain, patient flow, mobile and web-based assessment and electronic healthcare record solutions. A client who loves this space, askes us if VitalHub, which recently consolidated is shares, is good value at present.
Spring 2020 Stock Investment Seminar Cities
Kelowna – March 31, 2020
Calgary – April 1, 2020
Edmonton – April 2, 2020
Vancouver – April 7, 2020
Langley – April 8, 2020
Victoria – April 9, 2020
Markham – April 14, 2020
Oakville – April 15, 2020
Montreal – April 16, 2020
1) Covid-19.
2) Drop in oil – Canadian energy producers generally. Dividends in the sector, etc.
For the past decade, KeyStone has had minimal exposure to commodity based businesses as long-term decisions. We make that a conscious choice a long-time ago. We find that almost all businesses that are tied to an underlying commodity make highly volatile, poor long-term investments. Traders are free to trade these things, but we are long-term investors and generally they have limited interest to us. In fact, in our Canadian growth stock research we have recommended just one oil produces (and subsequently sold) and one direct service company in our Canadian and US growth stock research over the last 10-years combined.
Dividends – many of these Canadian energy producers pay dividends and unfortunately many Canadian have been buying these companies for their “attractive yields” for a decade or more. We see any business tied to a commodity such as oil and gas to be generally a terrible investment vehicle for a sustainable dividend. In fact, we have constantly stated that dividends in energy companies should be viewed as bonuses.
WE HAVE HEARD THIS WEEK that this was UNFORSEEN.
3) Fear in the markets.
Fear causes irrationality. And we expect to see some significant irrationality over the next several weeks and months.
We have already been asked what investors need to buy “right now” – initially most investors think that a 5, 10 and even 20% drop must have everything in the market so, so cheap.
I have put this drop in context to clients a number of times. Most of our clients who have attended one of our two weekly chat session (held each week) or our in person seminars held 2-3 times each year across the country or seen us at one of our many speaking engarments, or listened to this podcast weekly should know that we have seen the markets as relatively expensive over the past 12-18 months.
Let’s start there – in terms of buying the market today. When you have an asset or item you want to purchase, let’s say it is a nice suit or dress. You initially find it, and see it as expensive. You want it, but are waiting for it to come on sale. If that “expensive” suit or dress is part of a 10% off sale, it likely does little to peek your interest. In fact, many would still view it as relatively expensive. For most people to be interested, you might have to see a 25-30% drop.
That may sound shocking in the context of the markets, but this is where we were.
So what are the markets down since their highs or how much are we “on sale” today? The Dow is off 18.5%, the Nasdaq is down 17.7%, and the TSX (which underperformed last year) is down 19.4% (and more on a currency adjusted basis in US$s.
So are we running around like kids in a discount candy store like 2008-2009 – no. The markets, which were expensive a month ago are not yet generally cheap,
4) How do deal with it in a simple 15-25 stock portfolio.
We are asked the question of what to do in a crash all the time – less so in good times – but it is a constant theme at our seminars across the country.
The seminars are typically packed. Generally, we see less interest when the markets are down and more when they are up – it is human nature and we understand this. From a return perspective. We should have more interest when the markets are down. Human beigns are funny that way.
I love the space this company operates in – mind taking a look?
Christian – via Email.
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Your Stock, Our Take
VitalHub Corp. (VHI:TSX-V)
Current Price: $1.55
Market Cap: $27.59 million
What does the company do?
VitalHub Corp. develops mobile healthcare solutions that allow clinicians to access information about patients. Its technologies include blockchain, patient flow, mobile and web-based assessment and electronic healthcare record solutions.
And its platform provides control, security, privacy and consistency that is essential in healthcare.
Key Points:
The share price has been quite volatile over the past three years, but it has been on a slow but steady upward trajectory.
The company has been growing primarily through acquisitions, with its most recent purchase on November 22nd, 2019, where it purchased Oculys Health, which provides a real-time and predictive operational management system for hospitals.
Looking back at Vitalhub’s acquisition history, since October 5th, 2017, the company has made 4 acquisitions. Each of which consisted of Vitalhub paying with half cash and half stock, and over this period the company’s shares outstanding have ballooned from 66 million to 188 million. So, shareholders have been quite diluted over the years.
And at the expense of current shareholders, in January of 2020, the company conducted a 1:10 share consolidation, bringing its total issued and outstanding shares from 188 million to 18 million. And just a month after this share consolidation, the company continued on its path of diluting shareholders with another equity offering of 7.5 million shares in February.
Recent Financial Results: (Q3, 2019)
- Revenue was up 13%, to $2.4 million compared to $2.1 million for the same quarter last year.
- EBITDA was up 83%, to $285,000 compared to $156,000 thousand for the same quarter last year.
- Net Loss for the quarter was $475,000 compared to a loss of $293,000 for the same quarter last year – so no improvement there.
- Looking at Vitalhub’s current valuation, it has an EV/EBITDA multiple of around 21x which in my opinion is quite expensive.
- And looking at their balance sheet they have a net-cash position of $2.3 million and a D/E ratio of .138, which is relatively healthy.
Our Take:
Over the past three years Vitalhub’s revenue and EBITDA have certainly been on an upward trajectory, but the company has been struggling to work towards consistent profitability. So, with this being the case, Vitalhub doesn’t meet KeyStone’s investment criteria as it isn’t profitable.
Now my second concern towards an investment in Vitalhub is managements lack of discipline in preserving the companies cap table over the years, as we have seen the company make very generous share payments to acquisition targets, numerous public equity offerings and a recent share consolidation – where the company might be positioning itself to start the dilution cycle all over again.
I agree with the listener who stated that they love the space the company operates in as there has certainly been a shift in the healthcare sector for web-based health records and overall operational efficiencies through technological innovation. But due to the company’s lack of profitability and managements lack of discipline in preserving the company’s cap table, we would pass on Vitalhub.
