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Azure Healthcare Ltd Update - Takeover Proposal dropped, FDA registration granted.

2014-05-06T03:13:16+00:00

Azure Healthcare Ltd (ASX: AZV) just announced that the takeover offer won't proceed, and shareholders dumped their shares enthusiastically. I continue to hold, as I was never particularly excited about the takeover offer anyway. The long term future for Azure is bright, as it rolls out its solutions to more and more hospitals in the US. Because the new, more complete system has recurring revenue, Azure should increasingly have more stable growing cashflow. For the next 30 years or so, demand for hospital beds will only be going up. Azure helps hospitals profit more from each bed, and US hospitals love to profit.

It has also recently been announced that Austco has received FDA registration for its Tarcera Nursecall product. The company's new manufacturing facility in Texas has opened, and I hear that if demand supports it, the company can easily add more shifts to the plant. That means, that the company will be able to milk more out of the capital expenditure outlay.

In a recent Update Austco announced, "Austco’s new manufacturing facility in Dallas, Texas will have record shipments during the month of May to fulfill over USD$5 Million in secured orders across North America. The USA Factory is working extremely hard to boost factory production as it attempts to keep up with this rapid surge in orders."

I think Azure Healthcare remains a good investment and I'm holding my shares.

The Author owns shares in Azure Healthcare. Nothing on this website is advice, ever. The purpose of this blog is to keep track of my decisions and invite feedback

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Azure Healthcare Ltd receives a takeover proposal, and Nathan Buzza is leaving (ASX: AZV)

2014-04-30T12:22:32+00:00

Azure Healthcare Ltd (ASX:AZV) will be losing a key person, Nathan Buzza, who was responsible for overseeing the development of the software that is now revolutionising the business. As I previously pointed out, the fact that the company now offers software solutions - not just hardware - is central to the Azure Healthcare investment thesis. Indeed, it was only once Buzza (and founder Robert Grey) both rejoined the company that its fortunes turned around. At least the software has been fully developed, so to an extent, it makes sense that Mr Buzza is now leaving. Having said that, I don't think there is any reason why the company couldn't have put it on their website or issued a press release.

Azure Healthcare has recently announced that it received a non-binding takeover proposal from a party they did not name at a price they did not specify. As my friend Andrew Mudie speculated on the Motley Fool:

"Hills recently purchased Questek and Merlon; providers of nurse call systems and general health monitoring systems. The companies were significantly smaller than Azure and have inferior offerings (or so I’m led to believe) but are the type of platform that Hills plans on using to grow scale. Azure could well become a takeover target by Hills in time, especially if its US exposure becomes more significant."

Personally, I would have thought that it is more likely that there is an opportunistic buyer that is aware of the company because of the North American business, but the speculation is only important to the extent that there could be multiple buyers. If the nursecall system is going well, operating leverage could still send profits a lot higher, and it is quite possible that Pie Funds have slightly underestimated the value of the business. In any event, I have to say that if the share price rises above 41c, I'll probably sell some or all of my holding.

Interestingly, the share price rallied prior to the release of the takeover proposal and after the announcement shares traded as high as 41.5c. I believe any takeover offer below 38c would not be a serious bid, not least because Pie Funds mentioned in their excellent monthly newsletter that they think shares in the company are “worth 36c and possibly 40c in a takeover.” Personally, I think shareholders will be shortchanged if the company sells for anything less than 40c per share, but I would not buy at 36c or above.

The Author owns shares in Azure Healthcare. Nothing on this website is advice, ever. The purpose of this blog is to keep track of my decisions and invite feedback

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A few thoughts on Azure Healthcare Ltd (ASX: AZV)

2014-02-25T02:13:12+00:00

I've been a bit busy lately, but I wanted to record my notes on Azure Healthcare Ltd (ASX: AZV). Over the weekend I had a discussion about Azure with Motley Fool analyst Mike King, who noted that the half yearly results looked interesting. I believe the results reduce the risk of the investment (which is somewhat speculative), and I bought shares in the company on open yesterday at 27c and 27.5c. The purchase was funded by selling my remaining shares in Cryosite (ASX: CTE) at 46c, and selling 10% of my Global Health (ASX: GLH) shares at 70c, so it will be interesting to compare the investment to those two options in the future.

I almost added Azure Healthcare the Hypothetical Ethical Share Portfolio at 28 cents per share, but I decided not to because the company lacks sufficient recurring revenue, and is therefore vulnerable to health care cuts. Here are my thoughts on Azure Healthcare extracted (and edited) from my discussion with Mike. I definitely welcome feedback, as usual!

I have made multiple attempts to buy shares in Azure, but my order at 23c was expired when the company dropped to those levels in recent days. Words scarcely described the frustration I feel about this fact: possibly another investing foible I need to rub my nose in. Pie Funds was selling at around 24c - 25c. I was trying to get shares at less than Pie was selling at, but that didn't work out for me.

My thesis for buying is predicated on the company transitioning successfully from the sub-optimal hardware business to a business that has higher margin software sales. It's (network) software as far as I can gather, not software as a service; hospitals are the client. The Sedco acquisition was good judgement in my opinion, as they took out a competitor.

The most significant information I take from the half yearly is that management's stated plan to morph their business now appears to be evident in the accounts.

Excluding foreign exchange impacts, Revenue is up 43% from 2H 2013 and Profit is up 357%, even better than the prior corresponding period (pcp) comparisons. I'm using the preceding period, not the pcp, because I don't think that the business is notably cyclical. Either way, the results are similar if you compare to the pcp. These headline figures signify high operating leverage, only a good thing if revenues keep going up. The question is whether the increase in revenue is because of sales of the Austco Tacera Nurse Call System, or if it is because of hardware sales.

The company reports that "consolidated revenues from ordinary activities increased by 41.9% to $16.046 million compared to the previous corresponding period, reflecting increased demand for our new generation Tacera products." Tacera is an IP solution where all system components are fully IP configurable and have their own unique address for best in class supervision and system management, so it is mostly about the software.

Prior to this result there was execution risk for the Azure Healthcare story, and the company was priced as if it was going to succeed in its plans. To justify buying at 26c, I need the company to at a minimum repeat its 1st half performance in the second half, and subsequently to record growth of 20% on average over 2015 and 2016.

Question to you: can the company achieve this? I'm not sure, but they are off to a good start. This thesis would probably be broken is cashflow is significantly down next half.

Thee charts show the cashflow, revenue and net profit for the last three halves. Sources: HY 2014 Report, FY 2013 Report.

Usually, I'm very skeptical of a company being able to repeat outsized growth without a wide business moat. However, high margin software companies are capable of such growth, especially in their early days. If you believe such growth is possible, then I would call Azure a buy at 26c - 30c based on the discounted value of future free cash flow. In my models I have allowed growth of only 5% p.a. from 2017 - 2020, which should be easily achievable for the company; it's the next couple of years that will make or break the thesis.

The Author owns shares in Azure Healthcare. Nothing on this website is advice, ever. This post is for entertainment (and for my own reference!)

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