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Shrideep Murthy
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CFA Level 2 Candidate. Masters of Finance Candidate, PACE University, New York. Prior work experience: -24 months as a proprietary trader trading in NYSE and NASDAQ. -14 months as a C++ developer at a Top-20 IT Consulting organization, KPIT Cummins Infosystems Ltd, India. Portfolio Manager:... More
  • Greenestone Healthcare - A Growth Story In A Niche Sector 0 comments
    Nov 27, 2012 3:56 PM

    The Specialty Health Services sector is very well developed in the US, but it still has a long way to go in neighboring Canada. Trying to build an early mover advantage is GreeneStone Healthcare Corporation (OTCBB: GRST). GreeneStone operates medical clinics in Ontario, Canada, and has carved out a niche for itself in health services and addiction treatment. The company operates two Endoscopy clinics in Ontario that offer services in Screening Colonoscopy for colon cancer, investigatory colonoscopy and performing endoscopy procedures if required. GreeneStone also operates a private 36 bed in-patient facility at Muskoka which serves as an addiction treatment center.

    The table below shows a snapshot of the company's second quarter earnings for the past three years:

     

    Three Month Period Ended June 30

     

    2012

    2011

    2010

    Revenues

    1,348,582

    286,925

    5,964

    Operating Expenses

    1,467,168

    842,060

    113,313

    Net loss to shareholders

    (364,336)

    (720,381)

    (111,619)

    The company has two fully equipped and operational clinics, and as the number of patients continues to increase, there will be an incremental impact on the bottom line. In economics, this is called building economies of scale. This is clearly visible in the table above and makes GreeneStone a prime growth story.

    An analysis of the segment wise cost structure of the company further substantiates this proposition.

      

    Q2, 2012

    Endoscopy Clinics

    Gross Revenue

    446,339

    Fixed Costs

    Doctors fees

    245,750

     

    Staff Salaries

    77,131

     

    Rent

    40,995

     

    Total Fixed Exp

    363,876

       

    Addiction Center

    Gross Revenue

    902,243

    Fixed Costs

    Staff Salaries

    744,023

     

    Rent

    168,789

     

    Total Fixed Exp

    912,812

    In Q2, 2012, the company was able to cover its fixed costs and any increase in revenue from here on will add to the bottom line. The company reported positive operating cash flows of 195k in its latest quarter and it is very likely that the company will post a net profit for the last quarter of 2012.

    Below is a timeline of the company's expansion:

    Second Quarter, 2010 - Opening of the First Endoscopy Clinic.

    Third Quarter, 2011 - Opening of the Addiction treatment center, Muskoka.

    First Quarter, 2012 - Second Endoscopy clinic, downtown Toronto

    Second Quarter, 2012 -Second Addiction treatment aftercare facility, downtown Toronto

    Fall 2012 (planned) - Opening of an Eating disorder clinic, GreeneStone holds 33% stake in this venture

    Outlining its strategy on October 10th, 2012, the company announced that it plans to increase the capacity of the addiction treatment center from 36 beds to 300 beds in the next two years. The management said that it intends to buy several underperforming operations both in the US and in Canada.

    Below is segment wise revenue for the company:

     

    Q2, 2012

    Q1, 2012

    Q4, 2011

    Q3, 2011

    Q2, 2011

    Q1, 2011

    Endoscopy

    Clinics

    446k

    436k

    372k

    279k

    286k

    223k

    Addiction Treatment Center

    902k

    824k

    305k

    213k

    ---

    When investing in growing companies, investors are primarily concerned about liquidity in the markets and the capital structure of the company. Let us address these issues here:

    Liquidity: Market maker Wilson David & Co filed a 15C211 application to sponsor the company and undertake market making operations. This application was approved by FINRA and the stock has seen average volumes of 15,000 shares traded daily. The company announced on October 18th, 2012, that it will apply for a listing on the NYSE-Amex exchange which is anticipated to further enhance liquidity.

    Capital Structure: As of June 30th, 2012, the company had a total of 23,767,535 shares outstanding. The company has notes payable outstanding that will be converted into 14,601,917 million shares at various dates until May 31st, 2014. Apart from this, there is no major planned equity dilution.

    Given that this is a niche sector and GreeneStone services the Canadian market, there are no direct comparables. This limits our ability to perform a relative valuation. Since GreeneStone is still a growing company, it comes with inherent risks, and hence it may be an ideal choice only for investors who are comfortable with this kind of risk.

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