Some thoughts on MediNex IPO

MediNex IPO (Private Placement only)

Introduction

-The company engages in professional support services to medical clinics. Some services includes overseeing the setting up of clinics, facilitating applications for relevant clinic licences and providing business support services such as accounting and tax agent services, human resource management services and corporate secretarial services.

-The company engages in procuring of medical and pharmaceutical products as well.

-Lastly, it provides Business Support Services to companies outside of healthcare industry

-The gross proceeds will be $6.5m as 26m shares placed are new shares at 25 cents each. The net proceed will be $5.32 million.

-The main use of proceeds will be for acquisition of a company called Ark Leadership which will cost $4m according to the prospectus

Key Highlights

- Good Revenue growth. Company has grown its revenue very well in recent years.
Half year of FY18's unaudited pro forma revenue is 4.941m which is 90.2% of revenue in FY17.

-Profit growth encouraging. The profits for the company has growth from 487,000 in FY 15 to 946,000 in FY 17, Thats about 39.3% compounded growth over 2 years. The unaudited HY 2018 profits stood at $1.057 million which has exceeded FY 17 figures.

- Company's cash flow from operations are decent. Cash flow from operations has been pretty on par with net income. Its Cash flow from operating activities came in at $643,391 and $1.128m in FY 16 and 17 which is in line with Net income of $745,000 and $946,000 in the same time frame.

-Steady balance sheet. At 30 June 2018, total liabilities stood at $1.155m,.Company has roughly $3.376m worth of cash with $0.4m in fixed deposits. The company definitely has enough money to maintain operations and pay off its liabilities

Key concerns

-High amount of goodwill. The company has gone on an acquisition spree in recent time. As a result this has made goodwill an astonishing amount of $2.741m as of 30 June 2018. This is roughly 38.96% of the company's balance sheet.

-Nex's acquisition questionable? The acquisition cost was $3,569,235. However the earnings in 2017 was roughly 168,004. This meant that the company was paid at roughly 21x PE and $2.39m of goodwill was recorded.

-Restructuring exercise and acquisitions questionable? The company conducted a restructuring exercise prior to placement which resulted in Medinex being the holding company of the group.

It initially acquired 50% of AccTax at $375,000  at which the vendor provided a guarantee of Profit After Tax of $450,000 for a 3 year period if not it would pay five third of the shortfall. This translates to an acquisition guarantee PE of roughly 5 (taking into account 150 000 each year and 100% is at 750,000). It does look like a very good acquisition on paper but on 5 November 2018 it acquired the rest of the 50% for $750,000 (Yup double of its initial purchase). With that i am unsure if the initial profit guarantee still holds. From the picture below it seems like AccTax is still lost making in 2017.

It also acquired 60% of interest in Patceljon Professional Services Pte Ltd and  Jo-L Consultus Pte. Ltd for an amount of $1.0791m in June 18. It comes with a profit gurantee of $360,000 per year for 2018 and 2019. Once again this translates to an acquisiton gurantee PE of roughly 5 and looks very good on paper yet again! Then it proceeds to acquire 40% of the company on 5 November at $1.440m. It paid $ 17,985 for 1% of its stake earlier on in June 18 and then subsequently pays $36,000 for 1% of its stake in November 18.
Encouragingly, it seems that the company earned roughly $294'666 in Profit before Tax in 2017








-Growth revenue from own shareholder's entities.
Revenue increased from 1.1m HY 2017 to 4.459m HY 2018. This could be due to an increase in largest customer's contribution from 20.05% in FY 2017 to 41.79% in HY 2018. However a deeper look revealed some details.

While its definitely good to have some shareholders as your customer since it is likely they will continue using your services, its hard to estimate what the impact to margins will be in such cases. Furthermore a large increase has been due to these group of shareholders and it poses an interesting question to profitability of these increased revenues.

- 3Q 18 (July to September 2018) results bad.


HC Surgical held 35.8% of MediNex as of 1Q 2019 and it contributed $ 46,000 to its results.

This is 59.6% lower and working backwards, it seems like MediNex earned $232,600 in previous year's quarter compared to $128,491 in this year's quarter. This is roughly 44.75% fall in profits.


Conclusion

On initial glance, 1 Cent EPS for 1H 2018 and implying a layman 2 cents EPS for FY 18 results in a placement PE of 12.5 which seems to be very attractive if the company can continue its growth momentum in the following years.

However, the recent results seems to indicate a break on its growth engines for at least 1 quarter and implies that the PE will unlikely be 12.5

Furthermore the acquisitions has been weird in my view and the raising of $5.32m when the company has 2 million spare cash.

Lastly there has been no details about the P&L of Ark Leadership which investors can assess whether this acquisition is at a good PE. Interestingly Ark Leadership is owned by the sister of the CEO of MediNex.

This company (alongside HC Surgical) would unlikely be in my considerations for buying.....