Nobilis Health Has Yet To Prove Itself

| About: Nobilis Health (HLTH)

Summary

Q3 results did not answer our concerns.

Patience is needed for a turnaround.

Delisting is more negative than positive in my view.

Nobilis Health (NYSEMKT:HLTH) shares have been volatile in the past couple of months. Q3 results have been somewhat underwhelming. Further, delisting from the Toronto Stock Exchange angered a lot of investors. Let's take a look at each situation individually.

Q3 Results

The only highlight for the quarter would be the big jump in revenue to $70.7m, up 34.7%. This is a nice surprise, but things get murky as we go down the income statement. Our previous concerns (my last article is here) were not answered in any way. Adjusted EBITDA came in at a mere $4.3m, representing 6% in operating margin. Once you add back non-recurring charges, we are very close at breakeven for the entire quarter. Further, Nobilis continued to struggle collecting payments from insurers. I predicted that the stock will take off when the company starts to make money and turn the credit money into cash. Neither of my wishes came true.

Q4 guidance is reachable, but when will we see cash?

Many investors think that the Q4 guidance looks too aggressive. I'm more optimistic. Below is the guidance for Q4:

We all know Nobilis' business is seasonal and Q4 is the busiest time of the year. Given the poor EBITDA performance for the first three quarters of the year, we are waiting for Nobilis to make $40m in Q4. That is 75% of the entire year's operating income.

Revenue guidance (see above) seems reasonable at $97m, an 8% increase over previous year. However, the margin has to be over 41%. Nobilis' best quarter was 2015 Q4 when the margin reached 24.2%. 41% seems like a stretch. The one factor that has been killing this business is the marketing expense. G&A line represented 45~50% of the company's revenue. If Nobilis is able to dial down the marketing expense for this quarter, $40m EBITDA is doable.

The real question to me is does Nobilis make cash? Last year, the stock tumbled due to sudden jump in account receivables. It is likely to happen again this quarter. As such, Nobilis is a two-quarter story in my opinion. We need to see earnings in 2016 Q4 and we need to see cash in 2017 Q1.

Delisting from Toronto Stock Exchange

Nobilis delisted itself from the TSX at the end of last year. I view this as slightly negative.

First, let's talk about the negatives. Nobilis said dual listing is expensive. I think the management is referring to the energy spent on dealing with the Canadian investment community and research analysts. Nobilis management clearly does not like to answer tough questions quarter after quarter. I see future conference calls last less than 30 minutes and silence after management prepared notes. This means less information for investors such as myself.

My other complaint is that the company has built itself through the Canadian capital market. Now that it is fully capitalized and operational, management decides to leave. It does not smell ethical at all. Management never fulfilled its promises to its Canadian investors. Many fund managers are forced to sell because they are obligated to invest only on TSX.

I guess the only positive of the delisting news is that Nobilis believes that it does not need to raise cash in the near future.

Recommendation

Nobilis is a hold if you still have some shares. The stock is simply too cheap. With that said, I would not recommend people putting new money into the stock. Management cannot be trusted. Their actions are very erratic and unpredictable. I would not be surprised that management takes this company private with a low-ball offer.

Disclosure: I am/we are long HLTH.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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