Healthcare administration remains inefficient, allowing disruption opportunities for smart innovators. After a 30-year history in IT technology, Global Health (GLH) has developed its capabilities to provide software applications that improve integration and connectivity between clinics, clinicians and consumers.
In 1985 current CEO Mathew Cherian founded Perth-based Working Systems. His initial passion was IT technology and particularly software applications. Today the opportunity is to provide scalable cloud-based software for the healthcare industry that can be commoditised globally.
Mathew Cherian retains a 56% ownership of the stock’s $16 million micro market cap. With 2014 revenues of $5.25 million and net profit of $1.44 million, the stock definitely falls into the speculative category. Although the company risk profile has reduced with 80% of revenues now recurring, and there have been eight consecutive quarters of revenue and earnings growth.
The strong growth rates have been from Australia, however from early this year Cherian has begun to focus his attention on the untapped Asian market. The cloud-based applications reduce the cost of setting up in new locations, and early indications suggest neighbouring countries in the Asia-Pacific region present strong growth opportunities for Global Health.
Approximately 50% of its software applications are currently cloud-based, with the remainder a work in progress. The two main products are the Mastercare software, which is an electronic medical record system, and the secure messaging service for medical records called ReferralNet.
Revenues are currently collected from healthcare providers or business to business. Research is currently underway on how to monetise the large base of consumers the company has access to. This business to consumer opportunity is expected to contribute to earnings from 2016.
The company listed just before the NASDAQ tech crash in April 2000. In the following years the company learnt that its best opportunity was to transition away from services and towards software products for healthcare.
The shift has provided a bumpy ride for shareholders. Add the global financial crisis and the company was on its last legs by 2008.
After a recapitalisation that involved a number of rights issues that Cherian participated in, the company was able to refocus on the opportunity to develop its software products for the in-efficient healthcare sector.
From viewing the interview with Alan Kohler on July 26 and speaking at length with Cherian, it is clear he is excited and committed to the company’s opportunity.
Whilst many other industries are becoming more efficient thanks to technology disruption, healthcare is one industry with a long way to go. For example, the US spends one trillion dollars on healthcare administration annually, and about one third of both Australia and the US annual cost is administration.
One of the main efficiency problems is that a patient may have 10 or more points of contact in a healthcare episode that don’t connect with each other. For example a patient may have a flow path such as the following: GP - pathology - specialist - diagnostic tests - day surgery - anaethisist - pharmacist - recovery plan.
These can all be different businesses with their own history and databases. This lack of connectivity is one of the largest drivers of the increasing cost of healthcare, affecting all parties involved – patient, clinicians, clinics, health funds and governments.
Global Health Products
Technology developments allow the opportunity to improve the lack of connectivity. Over many years the company has spent significant amounts of R D on its products. There are currently about 15 software applications each with different functionality and purpose.
There are three main opportunities in monetising the consumer network linked to its current business customers. Including, preventative care, support for the chronically ill and the “worried well” or parents with growing children.
Traditional hospital-based products are approximately 40% of revenue, with another 30-40% from the growing mental health sector. Currently only 10% of revenue is cloud-based, with the remainder from "on premise" software, or software that utilises the customers’ internal servers. The transition to a higher rate of cloud-based software will improve the global scalability and efficiency opportunity for customers.
Although competition is high, management are unaware of any competitors providing the same range of solutions. Therefore the competitors for each product are generally different.
Hospitals generally stick with the same suppliers. This provides some security of earnings, but the static nature of the domestic hospital structure also limits growth. For example 10 years ago there were 1250 hospitals in Australia and today there are 1300 and spread amongst few owners. This compares with China where there are 26,000 hospitals and a view that another 26,000 will be required.
With overseas expansion, the reason management is focusing on developing nations is because they generally can’t afford the high costs from the large software companies, and as a result the low value markets are generally untapped.
In Australia there are 100,000 businesses involved in healthcare, with much of the growth opportunity from the non-hospital or non-acute sector.
In the non-acute space, management prefer fragmented sectors with many small businesses.
The R D cost of approximately $750,000-$1 million per year is all capitalised, and is likely to remain at about 15%-20% of sales. The fact that R D is capitalised rather than expensed means investors need to pay more attention to the free cash flow rather than the reported profit from the income statement.
The tough road to profitability has also left the company with $18 million of accumulated tax losses, and with net profit after tax (NPAT) currently at $1.44 million it will not pay tax for a few years yet. There is also a government refund of approximately half the capitalised research spending. This is due to a government tax rule for companies with accumulated losses and under $20 million of revenue.
In mid-July the company pre-announced unaudited FY14 results with expectations of revenue to have increased 16% to $5.25 million, a 42% increase in EBITDA, and a 32% increase in NPAT to $1.44 million. With the earnings per share of 4.4 cents it places the company on a PE of 12, but as discussed free cash flow is the greater focus when valuing the company.
Management has done a good job in reducing costs, with all internal systems now cloud-based. The company headcount of 29 is low, and the company has access to cheaper overseas labour.
Moving forward we expect margins to increase with the benefit of scale, and revenue growth should at least match FY14. The assumption that revenue will grow at the same rate is only factoring in the domestic growth from organic operations. Then there is more speculative growth that may come from overseas expansion with sales just beginning to be achieved in Asia now. The business to consumer opportunity is more likely to be a FY16 story, as further market research is required before releasing the products.
The other uncertainty is how much of the free cash flow is re-invested back into the business. With a high ROE, the company will argue it is in shareholders’ interests to re-invest as much as possible. The company has no debt and will be likely to remain that way for the next few years.
Mathew Cherian’s 56% stake in the company is above the preferred level for a small cap CEO. Although I don’t see him selling down, he may be open to dilution in the event of an acquisition.
Global Health (GLH) is a high risk, speculative opportunity that looks to be on the path of continued earnings growth.
Although I recognise the opportunity from expansion into developing nations and monetising the consumer, I have not factored this into growth forecasts.
The 80% recurring revenue and sticky nature of hospital revenues provides a level of comfort, however to reduce the risk profile further the company needs to achieve much larger scale.
I have a $0.75 valuation and price target which is based on a 13% cost of capital. The company is a Speculative Buy, with a high risk rating.
Click here for Global Health's Forecasts and Financial Summary.