Orion Health

[GoldenStag]

Looks like my IPO comparison with GTK was more similar than I realised; now including the obligatory post IPO bad news soon after listing and share dive.

[Schrodinger]

24-11-2014:


I remember I questioned your estimate at the time ... still expecting such a stellar recovery?

Raised a few eyebrows when they refused to nominate a forecast. First IPO I can remember that has done that. A forecast however bull**** is a useful yardstick to measure the trust levels to afford directors. Unless you are an evangelist or a lifer it should be a requirement for assessment. Don't know much about Orion's strategy as I stayed clear due to various factors but some indication of when it is likely to hit profitability would be extremely useful. Relying on pure capital gains has its risks when the growth music stops.

[whatsup]

From Market analysis James Cornell

Orion Health Group Ltd, a software company established 21 years ago, is seeking to raise $120 million in new cash from the issue of 21.1 - 27.9 million new shares at a price of 430-570 cents per share.

Existing shareholders will also sell $5.0 million worth of shares (i.e. 0.9-1.2 million shares) to the public in the Initial Public Offering.

Orion Health Group was a profitable business through to March 2013, earning a net profit of $7,750,000 but since 2012 has been “strategically focused on aggressively growing market share” in the United States, which has “required us to scale our delivery at a speed which has generated challenges, which in turn has adversely impacted our margins in the short term”.

In other words, they have had to spend a lot more on Research & Development and on Sales & Marketing to grow in a very competitive market. Expenses have increased faster than revenues and the business has become unprofitable.

Why would you want to buy into a company that had been “adversely impacted” by events? Perhaps because that might depress the share price and offer a low buying opportunity? Well, that does happen on the stockmarket, but not in the IPO market!

How “adversely” has Orion Health Group been impacted? Judge for yourself. The prospectus uses the word “adversely” no less than 42 times. Investors may be a little “adverse” to invest in a company with that many problems.

So lets look at some valuation statistics.

The market capitalisation after this Initial Public Offering will be around $720-915 million (depending upon the issue price of the shares). That is 93-118 times the net profit earned in 2013 (i.e. a P/E of 93-118) but the company became unprofitable in the year to March 2014 with a loss of $1,137,000. In the half year to 30 September, the company lost $14,756,000. Unfortunately, there is no suggestion that the company will return to profitability in the foreseeable future!

At least the brokers selling this IPO don't have to worry about a ridiculously high P/E ratio - but perhaps investors should worry.

Annual revenues to March 2014 were $153.0 million. Only 29% were recurring revenues, although these will increase in the future as the company moves from one-off, upfront, perpetual software sales to recurring annual Software as a Servicerevenues. Unfortunately this transition adversely - yes, that word again - impacts on revenue growth and profitability in the short to medium term.

We like software companies but profitable software companies can be purchased on Price/Sales ratios of 3-5½ (or lower). Orion Health Group's $720-915 million market capitalisation is a Price/Sales ratio of 4.7-6.0. That looks a little expensive, especially as most revenue growth has been from lower margin “implementation services” and “managed services” while high margin “perpetual licence” revenues will decline significantly (i.e. from more than 30% of revenue to just “10-15%” over the “medium term”).

For an unprofitable software company, we might be more interested at a P/S of 2-3. That would value the shares at about halftheir proposed IPO price.

Summary and Recommendation

Software is a great business, especially companies (like Integrated Research and Technology One) that can finance Research & Development (to improve and expand their services) and Sales & Marketing (to win new customers) out of revenues to generate profitable growth and also pay dividends!



Unprofitable software companies involve much higher risks, so are less attractive for investment. Logic is inverted when they are priced at a higher valuation. Why would investors pay more for a company that fails to earn a profit and is unable to finance its growth from internally generated cashflows?

So Orion Health Care may be a great company, but at a high valuation and with an unprofitable business it is not something we shall be buying for our portfolio.

From my reading of this comment I would say IMHO that if Orion were not able to have raised money via the IOP process it would have gone broke its bleeding money now that it didn't have access to before and how long can this carry on ?

[kiora]

24-11-2014:


I remember I questioned your estimate at the time ... still expecting such a stellar recovery?

Hard to see it now BP,the naysayers are having a field day !

[Crystal Ball]

Hard to see it now BP,the naysayers are having a field day !

They are indeed kiora, but I would say with good reason, unfortunately.....
looked into buying these shares but a few things did make me doubt and when I am not sure, I would rather wait and see. I think this is going to be a of a bumpy ride for shareholders, hope I am wrong for their sake....

[Lola]

Whole thing has the potential to turn into a reasonibly significant debacle.

Could OHE be FTX #2?
Surely not.

[biker]

Which brokers were principals for the IPO?

[Beagle]

If someone put a gun to my head, (you'd have to because I wouldn't buy either), and said would you buy this or XRO ? I'd choose XRO in a heartbeat. At least that has genuine dynamic growth and is substantially made up of recurring business regardless of how over-priced it may be. I find it peculiar that such a small float would seek a dual listing with all the extra costs that incurs and the size of the company's loss $14.8m for the six months to 30 September 2014 on turnover of only $80m looks like a real worry especially seeing as how the company has been profitable before. How is it that the company has been able to grow at 25-30% growth in the past while remaining profitable.
All the low hanging fruit in this niche health sector already picked ? Floating a pup with little to no chance of making any money in the foreseeable future ?
Current growth rates slowing despite massive increase in new staff hire ? Pricing in the next six years prospective growth that may or may not happen into the present IPO price like reestablishment of consistent 30% growth in future years is a given ?Have we got another Hirepool on our hands with a blatantly greedy promoter ?

What would a silly old conservative accountant know, posted 28 October Looked like a real DOG then and looks like a really SICK DOG now.

[winner69]

So the adverse impact this time was the iphone effect

http://www.nzherald.co.nz/business/n...ectid=11394467

Adverse 42 times in the prospectus .....must be more to cone

[winner69]

So this March quarter not going to be too flash either

While receipts from customers are traditionally slower in the third quarter of each financial year they were lower than expected in the third quarter of FY 2015 due to slower contract closures and billings in North America. Management expect this trend to continue in the fourth quarter of FY 2015. In addition receipts from customers were adversely affected by the on-going planned transition from perpetual licences to subscription contracts.