Allied Healthcare International (AHCI) is a British health care staffing company based in the US. Its core business is providing homecare aides to the disabled and elderly, typically for several hours each day. AHCI also has a small side business providing nurses and nursing aides to hospitals and nursing homes. AHCI is one of the larger companies in the UK in its sector, with over 12000 aides and nurses on its payroll, and has 115 branches throughout the UK. The outsized gorilla in the sector is NHS Professionals, a semi-public entity within the British NHS system which was created to provide NHS Trusts with their temporary medical staffing needs. NHS Professionals has around 50000 doctors, nurses and aides on its payroll.
To understand AHCI’s business, one must first understand the needs of its customers (see this excellent article for a brief intro on homecare aides in both the UK and the US). Basically, if you are disabled or infirm and require assistance to navigate your daily life, you have 3 options. Firstly, you can rely on your spouse or a relative to take care of you. It is estimated that 30-50% of the disabled and infirm are taken care of by unpaid care-givers. Secondly, you can move into a nursing home, which is an expensive option since nursing homes are staffed by certified nurses and doctors and are required to meet strict regulations. Lastly, you can employ aides who visit you for several hours each day to take care of your needs. This last option is by far the cheapest of the paid options. Many of the disabled do not actually need medical help on a daily basis; rather, they just require someone who can help them with their bodily functions and to do some of the routine work they cannot. As a disabled person looking for a homecare aide, you want to avoid suspicious characters who may steal from you or otherwise harm you. Very few people in that position will choose to personally interview and choose aides; most turn to a staffing company like AHCI. Aides applying to AHCI must have 2 professional references, have a complete immunization history, possess any required licenses, and pass a police background search. In addition, AHCI performs the required human resource functions of administering payroll, benefits and taxes. In the UK, homecare aides are paid for by the NHS, which contracts with companies such as AHCI to provide these aides to patients.
The investment thesis for AHCI is simple – it is extremely cheap, especially for a business in the recession-proof line of providing care to the disabled. The ongoing cost-cutting in the UK government has injected uncertainty into companies that rely mainly on government funding for their revenue, and AHCI missing its earnings target slightly in the fourth quarter hasn’t helped the share price. However, I believe that the danger from the cost-cutting has been largely overblown. Home health care is a cheaper alternative to nursing home care, and the reality of an aging population means that the market can only grow. Even in the extremely unlikely armageddon scenario of the NHS cutting home health care completely, I believe that patients will simply begin to pay out-of-pocket for their homecare aides, such is the necessity of the service. Furthermore, the upcoming privatization of NHS Professionals will concentrate minds on the valuation and potential for companies in this sector. Since its inception 6 years ago as a cheaper alternative to private companies to satisfy the temporary staffing needs of NHS Trusts, NHS Professionals has failed spectacularly to the tune of more than $150M in losses. NHS Professionals staff are generally overpaid due to union pressures, and an exodus to private staffing companies is expected once pay levels fall upon privatization. This will create a more level playing for private companies like AHCI, which has previously only thrived by concentrating on the more underserved homecare aides segment of the market.
AHCI has a pristine balance sheet, with no debt, and about $40M in cash. And on the earnings side, the company pulls in about $10M annually in free cash flow. And this business is on sale for a market cap of $107M. If you take out the balance sheet cash, this implies a multiple of 6.7, a ridiculous valuation even with the specter of NHS cost cutting. A more normal multiple such as 10 will result in an approximately 50% gain from current levels.
The risks to this investment are minor. Management holds a negligible amount of stock, and so there is a danger that capital allocation will be directed towards empire building rather than shareholders. However, to date, acquisitions have largely been rational (an Irish health staffing company was taken over for a modest $5.7M in May 2010), and management has announced $10M in share repurchases. The company is also self-insured for liability claims arising from its aides. However, these cases are rare, and it is difficult to envision large punitive awards in the absence of any systematic lapses or fraud.
In summary, AHCI is a cheap way to diversify your portfolio away from the US and into the UK market. It is a low-cost provider with a large market share in a recession proof business. I believe that AHCI can provide homecare aides at a price that is cheaper than NHS can even if NHS internalizes the staffing function, and in fact, NHS is going in the opposite direction by privatizing the NHS Professionals in early 2011. This event may bring new attention to companies in this sector, and is a possible catalyst.
Disclosure : I own shares of AHCI
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