The Lifehealthcare Group Ltd (ASX: LHC) share price fell 6% to $2.28 this morning in response to the company's half-year report which was released after market close yesterday. Here's what you need to know:
- Revenue up 13% to $62 million
- Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) grew 6% to $8.7 million, or 7% to $9.1 million excluding transaction costs
- Net profit after tax (NPAT) down 3% to $3 million
- Dividends of 6.25 cents per share, up from 5 cents previously
- No material impact to Lifehealthcare's prosthesis sales as a result of government review into prosthesis pricing
- Reaffirmed full year outlook for mid-to-high-single digit revenue growth, and low-to-mid-single digit EBITDA growth
So What?
It was a mediocre half for Lifehealthcare, although better in some ways than the same period last year. This time, Lifehealthcare generated significantly more cash flow from operations. Key business metrics such as the number of surgeons, surgical procedures, and average spend per surgeon all moved in the right direction, while the percentage of revenues tied up in inventory was significantly lower (lower is better).
The downside is that the company saw its margins compress due to a weaker Australian dollar, which affects the cost of the US-dollar equipment that Lifehealthcare purchases and re-sells. During the half, Lifehealthcare also saw its total working capital increase as it invested in more instrument kits, and the company invested in automating its warehouse management function.
Like we saw with Healthscope earlier today, Lifehealthcare reported EBITDA growth that was well ahead of its profit growth, primarily due to higher levels of depreciation. Although EBITDA can be an OK proxy for cash flow – which is very important for Lifehealthcare given its high working capital needs – I suggest that investors focus on revenue and profits, and look at the cash flow statement to see what cash flows were like. Depreciation is still a real expense.
Now What?
I'm growing wary of Lifehealthcare's financial situation. Some things, like a reduction in the working capital ratio, suggest financial prudence and good management. On the other hand, a big increase in the dividend – coming from a company with persistently growing levels of inventory, high debt, falling margins, and average cash conversion, is a little confusing. The use of a dividend reinvestment plan suggests that management would prefer to keep some of that capital in-house, but I would have preferred to see a lower dividend and a more financially secure company.
Some other companies like Dicker Data Ltd (ASX: DDR) and Paragon Care Ltd. (ASX: PGC) have similar distributor-style business models with many of the same challenges, and they have performed well. I may be being overly pessimistic. One of the key things I'll want to discover in the near term is if Lifehealthcare can successfully pass on the higher US-dollar costs to customers. If that pans out, the company could do well.
It's also important to remember that Lifehealthcare is a small business, trading on a pretty reasonable price. It doesn't have to hit the ball out of the park to do well for shareholders, especially if today's dividend proves sustainable. While I do have my reservations, I am content to hold my shares for the time being.
