Totally (TLY) undervalued? Healthy cash collection and profits
Totally plc provides solutions to the healthcare sector and is primarily in the business of providing outsourced departments for the NHS.
Management are carrying out a buy and build strategy in order to scale up and increase margins. Despite some operational progress, relentless institutional selling has driven the share price to what I believe is an artificially low valuation (latest share price 16.75p, market cap £9.8 million).
- Premier Physical Healthcare provides treatment and advice for musculoskeletal injuries. It delivers to NHS patients as well as prison sites and police forces, and corporate clients. The business offers sports massages and podiatry treatment, and has a network of clinics within health and fitness centres.
- About Health is a dermatology service provider across 18 clinics. Almost a quarter of the UK population reports a skin complaint each year (likely to increase given the aging population and population growth) and so there is potential to grow this nationwide as the current market in dermatology is estimated to be around £600 million.
- Optimum Sports Performance Centre is a physiotherapy provider offering services in 24 towns across 10 counties in the UK.
Totally saw a step change when it acquired Vocare in July 2017, resulting in a brief suspension of its shares. The stock reached a high up at 60p after the relist.
Vocare provides clinical healthcare services across the UK through urgent care centres, GP out-of-hours services, and the NHS 111 service. Vocare is providing a service for ten million patients annually and in 2016 delivered PBT of £1.5 million on revenues of £60.7 million.
Totally’s goal is to consolidate these businesses, stripping out unnecessary costs and progressively adding new businesses.
Concerns over balance sheet
It has been noted that Totally has a net current liabilities position.
This is due to the cash collection that comes into the business and as of the last results there was £9 million of cash within the bank. This is due to Totally both charging and collecting cash within the same month revenue are charged, and then staff are paid a month later (or more) in the cycle.
Totally’s competitors, Virgin Care and Care UK (whom Totally’s FD previously worked for), also have large net current liability positions.
The net liabilities position would only be a real concern for Totally if the company stopped trading tomorrow. For Totally to stop trading tomorrow, their quality of care would have to deteriorate so badly they would lose customers.
However, quality of care is making great strides in improvement, as can be seen recently when all three services in Staffordshire were reviewed as ‘Good‘ by the Care Quality Commission (CQC), with one service upgrading by two CQC ratings in six months! This is significant as the re-ratings mean there are now no more ‘Inadequate’ ratings across any of Vocare’s 24 services.
Totally’s clinical improvements should help it both to keep its existing contracts and to win new competitions (though of course this is not guaranteed).
As of the current results the company has £9 million of cash within the bank versus the market cap of £9.8 million.
Clearly, the company is being priced for failure despite the operational progress, and this is down to several institutional investors dumping stock relentlessly, creating what I believe is an artificially low share price.
For FY19 the company expects to generate revenue of ~£90 million and EBITDA of £2 million. Cash generation for FY19 is expected to be around £2.4 million.
One concern I have (whilst I believe in the company’s business model and seeing how it could scale) is the lack of director holdings. I find it troubling that Wendy Lawrence, who is paid £160,000, cannot find a few pennies behind the sofa in order to purchase some stock.
Additionally, the company approved a share buyback at its AGM which has not yet materialised. I spoke to the Chairman, Bob Holt, who said that they would not use the share buyback in order to support the share price.
That is fair enough, but what is the point in the company buying stock at 40p when it could take twice as much stock out of circulation at 20p? He also said that sellers cannot sell if they do not have the liquidity to do so (make of that what you will).
Despite these points, I believe those who have the stomach to buy when everyone else is selling could make a handsome profit if they are willing to hold. The stock has been trashed from a high of near 60p to its current price and it seems the only reason is one institutional exit after another! I am no longer holding Totally, but it remains on the watchlist.