22/2/23 Austco Healthcare Appendix 4D and HY Dec 22 Results

Catching up on reporting season for a few names.

A tidy result from AHC as they continue to emerge from the effects of Covid. Headline numbers were revenue up 29% to $20.5m and underlying NPAT (removing subsidies/grants from prior period) up 57% to $1.3m. A re-instatement of the dividend was also a sign management are confident the headwinds from Covid are abating.

The highlight of the result was software revenue up 47% and accounting for 18% of total revenue (a record result). This helped drive gross margins to 55%, not quite a record itself as the contribution from the high margin software revenue was offset by some lingering supply chain issues. Management did say that the second quarter was better than the first for executing on orders which bodes well for the second half and FY24.

In general cash conversion was solid with operating cash inflow of $1.2m despite another increase in inventories by $2m to $11m. I'd expect to see inventory begin to normalise as the company executes on it's backlog of orders from ~25% of revenue now to <20% pre-Covid.

At first glance the increase in the overhead cost base from $7.3m last year to $9.6m this year is concerning, but it is worth noting the frontloading of the cost base occurred in 2H22, with 1H23 largely flat on that result ($9.5m).

On the current numbers AHC's return on equity of 9% on the rolling 12 months looks lacklustre but I expect return on capital metrics to improve sharply in the next few reports. Most of the improvement will come from a general increase in margins as Covid effects on supply chains ease and software revenue continues to become a larger % of the total.

Beyond that, it is worth noting that nearly all of the capital in the business is working capital with only $400k of PPE and no debt. As inventory pressures normalise we should see the strain on working capital ease which will help improve profitability metrics.

28/11/22 CEO's Address to Shareholders

There wasn't a great deal new in AHC's AGM (mostly updates on new products) but the one interesting piece of information came from their backlog graph:

Since the last update at the FY results, AHC tacked on roughly $5m of new contracts in October and executed a good chunk of the backlog in November. The Chairman's address gave some more information:

Given RTLS and annunciators are higher margin products, it bodes well for a strong 1H23 result. I'm forecasting $3-4m NPAT in FY23, that does rely on supply chain and customer access pressures alleviating which management did indicate will likely persist through FY23. Nonetheless the movement in the backlog seems positive and will have the ability to re-assess at the 1H23 result

25/8/22 Appendix 4E & FY22 Financial Statements

A solid result from AHC, headlined by a 15% growth in revenues despite cycling a tough comp in the 2H21. Management called out the easing of Covid restrictions in key hospital and aged care customers particularly in the 4Q which hopefully bodes well for momentum into FY23. Software revenue grew 18% a solid result but probably below the expectations of management given they are trying to grow software to close to a 50/50 split with hardware revenue (from 14.5% today). That said, management have been clear since the onset of Covid that sales in the segment are complex and benefit from sales access to sites which has been disrupted.

Margins were pressured in FY22, at the gross margin level supply chain issues and chip shortages continue to pose challenges but in the face of that only falling from 53.5% to 52.4% is probably a good result. At the operating level margins took a larger hit with the forecast increase in sales and R&D that was put on hold through Covid disruption. Underlying NPAT increased from $1.5m to $1.7m but benefited from a lower tax rate.

Free cash flow was basically breakeven for the year, down from $1.4m last year. Like many manufacturers the culprit was a build up of inventory, however I will give AHC some leeway here given $3m of the increase was finished goods and the business continues to have a strong order book waiting to be eaten into quickly.

My takeaway from this report is AHC management are flipping the switch from "survive" to "thrive" with Covid disruption now getting further into the rear view mirror. The cost base has been ramped a bit to support a deeper sales team, the former head of Hills Health Solutions (main competitor in APAC) has been poached as the new COO and the order book supports revenue growth over the next couple of years.

25/1/22 Austco Healthcare expects improved profit for 1HFY22

A nice update from AHC, despite some ongoing issues implementing their record order book due to Covid, they were able to record $16m revenue a nice jump on the $13.9m in 1H21 though slightly down on the $17.3m in 2H21.

Underlying NPAT guidance is for $750-900k again a nice jump on the $100k in 1H21 but slightly down on the $1.4m in 2H21.

The Order book was $21.3m, down from $22.9m at the AGM as they were able to implement some contracts late in the year.

Management outlook continues to be conservative with ongoing challenges from Covid and supply chains, market updates continue to be positive.

24/11/21 CEO's Address to Shareholders

Not much in the update from AHC, they were a bit circumspect on the short term outlook in particular managing the microchip shortage and on-going Covid disruptions with hospitals.

That said, the update to the Order Book was solid, increasing 14% since early September from $20.1m to $22.9m. They had previously announced a $1.6m contract to the ASX but clearly have won some smaller contracts around the edges. There was no commentary on booked revenue, I have emailed the company to see if they are willing to provide any commentary but unless there was a very sharp decline in the FYTD the growth in the backlog is impressive.

Have had to be more patient with AHC than I expected but can't argue with the execution of the business since owning. The share price will catch up eventually!

27/8/21 Appendix 4E & FY21 Financial Statements

Solid result from AHC with NPAT coming in slightly ahead of recently provided guidance. Headline numbers were revenue down 1% to $31.3m and NPAT up 37% to $3.4m (guidance for $2.8-3.3m). Worth noting the company paid a higher tax rate than last year, PBT increased 49%.

It was a tale of two halves, with the Covid affected 1H recording $13.9m revenue and barely breaking even at the NPAT level after adding back Government subsidies. However, with Covid restrictions to hospitals and aged care facilities easing the 2H the company was able to work into their backlog and record $17.3m revenue and $1.4m NPAT.

Impressively, the company continues to grow its Open Sales Order Book which now sits at $20.1m, up from $17.1m at last reporting in May. 

Cashflow was solid despite an increase in prepayments and receivables (not a major concern given quality of customer base, likely just a timing issue). Free cash flow was flat at $2m.

The balance sheet has $7.8m cash with no debt.

AHC have spent the last couple of years trying to shift their business model while also contending with US/China tariffs and then Covid-19.

I think management should be commended on the results they have achieved so far to try and move the business from a lower margin pure hardware business to a higher margin hardware/software business.

As can be seen in the image below, the business began to shift production from a reliance on Chinese suppliers to several outsourced manufacturers around the world to the point where their Dallas manufacturing plant was closed in December 2020.

A combination of growing higher margin software revenue and outsourcing lower margin manufacturing saw gross margins grow from 44% to nearly 53% in 2H20 despite Covid affected revenue and the onset of higher shipping costs from Covid disruptions.

The FY21 report will be interesting to see where margins land with manufacturing now fully outsourced and the effects of Covid beginning to dissipate in key markets. 

Austo Healthcare (AHC) is a provider of nurse call systems and software for hospitals and aged care facilities. Their Tacera system is best-in-class with recent R&D efforts to allow for real-time location of nurse staff to automate procedures, provide efficiencies and generate actionable data for customers.

Covid impacted the business heavily as they were unable to access sites to perform installations, upgrades and maintenance easily. This can be seen in the revenue chart below as revenues fell sharply in 2H20 and 1H21.

However the company continued to win new contracts and this resulted in a record order book which is now being eaten into with the recent FY21 update confirming 2H21 has seen a return to the $16-17m revenue of 2019. Interestingly, despite calling out a record order book at both the FY20 and 1H21 results, management confirmed the book continues to grow and is still at a record level despite the increased revenue meaning they are replenishing the orders faster than booking revenue even as restrictions are removed.