Change Healthcare Inc. (CHNG, Financial):20
Business description:
- Change Healthcare (“CHNG”) provides a suite of software, analytics, technology-enabled services and network solutions that drive improved results in the workflows of healthcare system payers and providers.
- Solutions are designed to improve clinical decision making, simplify billing, collection and payment processes and enable a better patient experience and outcome. The offering is modular and can range from discrete solutions for specific geographies or departments to broad enterprise-wide solutions.
- Company facilitated nearly 14bn transactions, $1tn in claims and distributed $150bn in payments in FY19. Customer base includes the vast majority US payers and providers including 2,200 government and commercial payers, 900,000 physicians (90% of active US physicians), 118,000 dentists (59% of active US dentists), 33,000 pharmacies (50% of US pharmacies), 5,500 hospitals (89% of total) and 600 labs. The network reaches 112mm unique patents, or 34% of US population.
Why we like the business:
- 100% customer retention rate in FY19 with 88% of revenues recurring.
- Company grows with medical billings in dollars and number of transactions, share gain and additional solutions.
Why we had an opportunity to invest:
- Company’s leverage of 4.6x was elevated versus many companies on the market. Yet Company had no liquidity issues or close covenants and in a space where companies trade at 10-12x EBITDA, a company with 88% recurring revenues (including volume-based) should be able to handle 4.6x leverage and reduce leverage within one or two years.
- COVID-19 has so far resulted in reduced medical billings for a time as hospitals, practitioners and consumers postpone non-emergency visits. We believe COVID-19 treatments will make up for part of the difference and elective procedures will eventually return. In the meantime, management is working on improved cost structure that should benefit us beyond COVID-19.
- Company has multiple divisions and they never seem to all perform well at any given time resulting in poor growth. We believe that between a divestiture and investment, the Company is taking the right steps in addressing the performance and will show both growth and margin improvement.
Thesis:
- Sell-off caused by COVID-19 provided an attractive entry point to a leading and essential service provider to the national healthcare industry. We believe the disruption is temporary.
- Over time, as company demonstrates improving growth with strong contribution margins, we think its multiples should go back to 10-12x.
Key Performance Indicators (KPIs)
- Revenue growth, EBITDA margin, FCF, Leverage and Capital allocation.
- Overall healthcare spend and focus on medical waste.
From FPA Capital Fund (Trades, Portfolio)'s second-quarter 2020 commentary.
