This is not investment advice and is general in nature. Do your own research before taking any positions in the securities listed below
Overview of $HLA
Firstly, I have a healthy distrust of roll-ups. Of course, there are some that work, however, it is genuinely difficult for investors to assess:
whether management can acquire & integrate well (e.g. PSQ dispute)
likelihood of future dilution or over leverage from bolt-on acquisitions
attrition rates for practitioners once they have sold their business to the roll-up
In case you don’t know - $HLA started out as a podiatry business in Bowen Hills and now covers a suite of products; Feet & Ankles; Bodies & Minds; and Eyes & Ears.
At c.$150m $HLA is a microcap with the following quirks of the business:
Unit economics - Organic growth is not a big focus for $HLA because LFL growth is low (3-5%) and store economics is not great (e.g. $500-700k per store) This is due to medicare/insurance setting limits on their potential revenue/working hours
Alignment - They have a logical alignment structure (owners retain non-voting shares to keep alignment with the business). There is some reasonableness to their not granting them votes prevents them from blocking the acquisition of peers
Most acquisitions are at low multiples - Generally, $HLA's goal is to buy small players at 4-5x EBITDA. However, from time to time they need to pay 7-8x for a bigger platform
Cash conversion - Most of this business is serviced-based (aside from US orthotics plant) so cash conversion is great; generally c.90%
MAF's Block trades this year
From May'22 to 9 Nov'22 - MA Financial amassed an 8.4% stake in the business (noting that part of their trades was participating in capital raising )
Without knowing first-hand what drove this trade there were a few interesting about it:
WAM followed MAF in increasing its stake over the same period
MAF has experience in this sector (Japara & Infinite Healthcare)
It is not necessarily an inconvenient thing for MA Financials advisory business to have such a stake in such an acquisitive business (i.e. advisor fees where necessary)
So should you pile into $HLA because WAM and MA Financial have backed it? I personally won't but let me explain why:
#1 - Historical dilution happened at healthy share pricess
Shares on issue have grown at 15% CAGR
And staff have not undertaken buybacks, rather joined in
#2 - $HLA need to buy a $4 note & revalue it at >$4
The EBITDA multiple between $HLA & its bolt-ons is closing.Acquiring small business at 4-5x EBITDA requires a lot of effort/transaction costs so $HLA are going to lean towards bigger deals (e.g. BIM) at 7x. The issue with this is $HLA is trading at 6x EBITDA multiple on a debt-free basis ($155/$25m) - so you don't get that huge arbitrage at this share price.
#3 - $HLA will need to come back to the market again
With another $20m p.a of acquisitions planned; $13m in spare cash & limited debt headroom, I would be surprised if another fundraising was >6mnths off
#4 - The gems is its OT/Physio business but they have drifted into other products
Generally speaking the expansions to the US (albeit partly for podiaty manufacturing) and eyewear are yet to be super value accretive. At a superficial level - the physio business so has the best unit economics & normalised trading post-COVID (and they are still just 4% of the market)
Conclusion: Despite the falling share price of $HLA and very smart capital allocators ($MAF and $WAM) buying it. Firstly - I cannot see how holders won't be diluted again shortly or how it stacks up to raise $ at 6x EBITDA & buy companies for >4x EBITDA. Finally, I do rate their OT/Physio business but I'm put off by them moving out of this space.
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