Bastide le confort and newsletter update
French Healthcare compounder
Hello! Not a lot of time passed since I published my thesis on Bastide Le Confort. However a lot of things happened.
Bastide is a French healthcare service company providing devices and service in the at home care segment mostly for the elderly. It is actively consolidating the industry. The price development has not been great, more or less like the market. You know my position on the subject: I simplify the mental process to a maximum now: I add to positions without thinking about the market and the sentiment.
1-First there was a scandal related to savings and rationing of food and diapers in France and Europe biggest retirement home company Orpea, causing pensioners to be left badly mistreated and hungry, which saw the stock and the whole retirement homes sector tank.
https://www.etui.org/news/nursing-home-group-orpea-centre-another-scandal
Many whistleblowers complained about these facts for years without consequences and we all knew about it through forum posts, youtube videos, testimonies, but the media ignored it each time. That is also the reason why I preferred to invest in a home care company rather than a retirement home company. Now it hit mainstream and the politicians speak about it. It is a strange media phenomenon to have the issue purposely ignored and then put on the front stage like it was a new discovered injustice.
Orpea is a client of Bastide for some supplies provided to the retirement homes. Also, as Orpea is under scrutiny, the press and authorities are digging into everything they can, from accounting to tax avoidance, and with modern complex organisations like a multinational company, they found various issues which we do not know yet if they are illegal or just bad oversight. I think some of it is definitively dodgy and some of it is due to the impossibility to control a human organisation perfectly from A to Z.
2-Interview of Bastide CEO (text that can be easily translated) - that also mentions the Orpea scandal, which represents 2 to 3% of the group revenue as a client. It seems to me that at worst Bastide is a victim of strict negotiation tactics from Orpea.
3-Bastide started share buybacks for the first time: it was 0.1% of the market capitalisation in 3 days, not huge, especially that it stopped afterwards. Let’s see if it resumes.
4-Bastide published H1 result for the 2021-2022 year. EBITDA and operating profit are up 7.5%, which is great because last year had a very strong basis with all the masks and covid supplies provided to hospitals and retirement houses. The other activities are up 20% in revenue.
The Group generated cash flow from operations of €35.5 million, thanks to a 16% increase in cash flow from operations before tax and cost of financial debt to €45.5 million. The cash generated is thus largely superior to operational investments and contributed to the financing of acquisitions, which led to a cash outflow of €24.5 million over the period.
Bastide then provided a revenue update for Q3 of their business year, with revenue up 6%, due to acquisitions, because the sales of covid personal protection equipments are logically down. The outlook was confirmed.
5-The group made its first acquisition in North America, in Canada, it marks a “Strategic shift to Canada and North America” according to Bastide. It gives even more room to grow on this gigantic market. We will have to see how the integration works. It is still a small acquisition on a 444 million Euros revenue company.
Groupe Bastide acquired 100% of the capital of Medpro Respiratory Care (including its subsidiary Healthy Heart SleepCo), a major respiratory care operator in Canada. Founded in 1998, Medpro Respiratory Care achieved sales of C$14m in 2020, approximately €9.5m. The group operates in British Columbia, Alberta and Ontario. It offers a wide range of respiratory products and services to meet the needs of its customers, particularly in:
▪ Oxygen therapy ;
▪ Non-invasive ventilation ;
▪ Sleep apnea.
With all these recent acquisitions, the net debt to EBITDA ratio stays high at 3.5. acquisitions will continue in 2022, according to the presentation. I like the debt ratio a bit lower, but the business has good visibility and management who knows what it is doing.
Conclusion: I used the recent weakness in Bastide to get a few more shares. It is a long term compounding machine with reasonable chances to continue for a long time, it is not affected by the macro environment much, it ticks all my boxes.
Aparté: is Orpea stock an opportunity? Possibly, but I think we are too early in the scandal, the FCF generation is not that high, and political pressure has not really started yet. In turnarounds, we have time as the share price usually stays depressed even after the turnaround is fully underway. Right know, we do not know the future earnings power of Orpea. There are a lot of discussions about Orpea stock in France, but at this early stage, its speculating on outcomes.
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How does the current state of orpea affect to Bastide?
Do you know at what prices they're acquiring other companies at? The next step would be to figure out whether they do any write-downs at the time of acquisition. EV/EBIT 14x is okay but maybe fair if organic growth is low single digits.