Paradigm impressed with growth and opportunities at Healthscreen Solutions
29 May 2008
Paradigm published the following research today on Portfolio III company, Healthscreen Solutions:
Healthscreen is expected to report Q2/FY08 results (ended March), which were
essentially in-line, including revenues and EPS of $2.2m and ($0.01), versus our $1.9m
and ($0.01) respectively.The key growth area, namely, physician services (which includes CallerMD and
PrevCareMD), continues to show good q-o-q and y-o-y growth. PrevCareMD in
particular had a fairly good quarter on a q-o-q basis particularly given that the deadline
to submit for the 2007 preventive care bonuses was on March 31st, although physicians
have until September to take advantage of their 2007 bonus. The company also
received their first cash receipts from the recently launched HealthAlert service,
although revenues will not be recognized until future quarters.On the cost side, total expenses (excluding other income and taxes) increased from
$2.6m last quarter to $2.7m. The company has been aggressively growing its
infrastructure to address the opportunity it sees before it. Headcount has increased from
69 at the end of Q1 to the current 110. Despite the increase in expenses, EBITDA did
improve from -$311k to -$273k.
The company ended the quarter with $0.8m in cash based on an operating cash outflow
of $734k, along with capex of $224k. We expect cash to get a boost from working
capital as accounts receivable are collected related to preventive care bonuses over the
course of the next few months.
Subsequent to the end of the quarter, the company also entered into a debt financing
agreement for gross proceeds of $4.25m. The secured debentures have a term of 24
months and a interest rate of 12.75%. The proceeds will be used to fund the company’s
acquisition strategy and for general working capital purposes.Reiterate Buy Rating
On the back of the Q1 results, we have made some minor adjustments to our forward
estimates, primarily to reflect a higher operating expense assumption, along with higher
interest costs related to the debt financing.While early in its growth stage, we continue to view Healthscreen as a compelling way
to leverage the inefficiencies (and therefore opportunities) inherent in the Canadian
healthcare system. We also view the company as a potential hedge against a slowing
economic environment (i.e. given that physicians will be more likely to sign up for
services, which generate more revenues at almost no incremental costs to them).
Based on our revised earnings forecast, we are lowering our target price to $0.75 (was
$1.00), based on 20x FY09 (ending September) earnings.
FMU
(Disclosure – Fund III holds warrants in Healthscreen)
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