Having just about reached the halfway point of 2020, I can honestly say I’ll never forget the last six months. At times I wish I could.
Markets seem to be focusing on how quickly (slowly?) the economy and employment bounces back. The onset of what appears to be a second wave of CV19 has certainly taken the wind out of the sails. I remain very cautious on the market and the recurring nightmares of March keep me from feeling great despite our performance being net positive on the year and well ahead of the markets.
As we make the turn into the back half of the year, I’m going to be refreshing the Tailwinds’ universe. It’s long overdue as there are several names that I’m very intrigued by and want to add to coverage (Dyadic and mCloud being two for sure). I’ll be dropping other names out to make room. This all happens next week.
This week, I’m on a mini-vacation. Yes, you can still actually do that. My biking bubble is up in Ashland Oregon, riding amazing trails and cooking up big meals with big red wines. It’s super fun and is causing this newsletter to be rather abbreviated.
Please do read on. Interesting updates on conversations with and news from MTBC, DYAI and mCloud follow.
Last week MTBC announced their biggest acquisition ever. I managed to catch up with their CFO Bill Korn to discuss this transaction and its impact on MTBC.
Meridian Medical is a former GE healthcare unit that was sold off to private equity a few years back. They have a lot of current business but was not well run (losing money) and saddled with debt. MTBC bought it from the debt holders for around $20 million; the private equity owners got nothing.
This is a consistent theme for MTBC who have developed a great business around buying companies on the cheap and integrating them into their platform. They are excellent operators and they manage to turn the acquired business around quickly, generating positive gross and net margins within a couple quarters.
The details of the Meridian transaction were rather vague. By it being their “largest acquisition to date” it has to be at least $30 million in revenues. Here’s what their CEO said about the acquisition…
“We expect to provide increased revenue guidance as part of our second quarter investors call as a result of this transaction. We also believe that Meridian’s team, digital assets, and customer base will help further accelerate our growth and margin expansion during 2021 and beyond.”
While it’s obvious that their revenues will go up as a result of the purchase, it’s great to see they expect margin expansion as well. This shows that, despite Meridian losing money, they expect to integrate the business seamlessly and have it be accretive.
Margin expansion on top of higher revenue means that we should see MTBC trade at a higher multiple eventually. What multiple is it trading at now? If we assume that Meridian brings $40 million in revenues to MTBC, they will likely have around $140M in revenue in 2021. Net margin goals for the Company are 30% on their EHR business (backing out $12M in revenues from their small practice management business) which means they will likely have around $40M in EBITDA in 2021.
The enterprise value of MTBC, which has $109M in preferred stock outstanding, is about $210 million. Thus, MTBC is trading on a 5.2 multiple of EV to EBITDA. This is very reasonable if not cheap for a solid growth story.
Of course, that growth is by acquisition, so every time they acquire a company their Enterprise Value increases by the cost of it (simplistically speaking). If acquisitions are at a multiple lower than 5.2X EV to EBITDA, they are accretive. In the past, acquisitions have been very accretive.
Looking at Meridian, they paid $20M for $40M in revenues. With 30% net margins, EBITDA on Meridian once they have cleaned it up should run at $12M. Basically, MTBC paid a 1.75X multiple for Meridian. This is the definition of an accretive deal.
MTBC has great management, is a consolidator in a fragmented space and is trading at a reasonable multiple. With revenue passing $100M this year, they should also start hitting some institutions’ radar screens. I remain very positive on the Company.
Dyadic (DYAI) appeared in the Motley Fool on Wednesday, in an article titled
Also, CEO Mark Emalfarb, as he’s done numerous times in the past, appeared in a video interview. Lots of great information in here.
Finally, this news blurb caught my (and the market’s) eye:
“Dyadic International is attracting attention from potential developers of coronavirus vaccines worldwide after striking a US government deal, the biotech says Thursday. Dyadic’s Chief Executive Mark Emalfarb tells Dow Jones Newswires it has received interest in its technology from parties in South Korea , Belgium and elsewhere after announcing earlier this month that the Frederick National Laboratory had chosen the company and its fungal-based C1 gene-expression technology to produce several Covid-19 vaccine candidates. Florida -based Dyadic claims C1 could make mass vaccine production faster, cheaper and more effective. Meanwhile, Emalfarb says research groups in Europe and Israel are also progressing Covid-19 vaccines using C1, with Israeli researchers potentially set to start human trials later this year.”
The more I read/hear about Dyadic, the more convinced I am becoming that they will permanently alter the healthcare industry.
mCloud (MCLDF) is a new name I’m keeping on the radar screen. This week they announced a partnership with nybl in which they will jointly connect and optimize over 2,000 oil wells. This is an interesting partnership that will likely generate more than $600 CAD per well per month, with the revenue sharing split not being announced publicly.
In addition, they also announced an acquisition and a financing. In acquiring kanepi they increase their technology offering and also gain entrance into a high quality, rapidly expanding customer base. Using the metrics provided in the transaction, it appears they are shooting for kanepi to generate $24M in revenue over the next two years, which puts the purchase price of around $10M at some level under 1X expected forward sales. mCloud is well positioned to continue its rapid growth and, with an anticipated uplist to nasdaq later this year, the stock could be a strong performer.
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