The 1st quarter produced EBITDA of $4.8 million or $2.10/shr fully diluted and cash flow of $4.4 million. So if you annualize that, it is $19 million. The debt now stands at $64 million. A 6 times EBITDA valuation is $114 million less $64 million equals $21/ shr in a sale. At 7 times EBITDA it is $30/shr. There is some big leverage here and little downside. This message board is full of negative comments which just makes me more intertested.
1. Monarch has terrible relations with its dental groups. Turnover has been an admitted issue in past calls.
3. Annualized EBITDA of $19 million. Is it sustainable based on (1) above, let alone grow?
4. Using 6 or 7x EBITDA valuation is very aggressive based on (3) above and banks are only lending at 2.25-2.5x EBITDA right now (not 3x mentioned in other posts).
5. The deferred maintenance costs in MDDS's practices is growing. Look at the cash flow statement. Say 15 offices need to be rebuilt, at $350,000 each that's $5 million. Add another $50,000 to upgrade the other 140, that's $7 million.
So with all of this being said:
Debt: $64MM Equity for current shareholders: $6 per share x 2.3MM shares = $14MM Equity needed for deferred capex: $12MM
This adds up to $90MM or 4.7x EBITDA. But at least now the offices are decent. Next they need to tackle the growth story to get a more attractive EBITDA valuation multiple. They'll have to attract and retain more doctors and hygienists.
Yes there is huge leverage, but you would have to be an astute buyer to pull this one off. And if doctor/hygienists costs trend up, then the $19 million of EBITDA becomes something less.
It would seem this would only be doable if the banks are willing to take some sort of haircut. But the banks are hoping the crack management team can make Monarch hum. They haven't done it during the past two years. This company needs an expert in game theory.
Theoretically this sounds good but the credit markets stink right now and banks are lending at 2.7x EBITDA. This means any deal can only get leverage of $51 million (using $19 million in EBITDA). How much equity do you think someone will invest in MDDS? At best deals are being done at 5x EBITDA and that would require $44 million in equity ... that's tough to see.
5 times EBITDA is $13/shr. The senior debt is tranferable and has interest coverage of 3.6 times. The LBO guys need interest coverage of 3.0 times interest in EBITDA to issue debs to insurance companies. Borrowing capacity is $35MM with 13% debs. That would leave $9.2MM for cap ex and return on equity. With a 40% ROE (after 2MM of capex) or 7MM cash flow, the buyer could pay $17 million in equity. That totals about $20/share. We will see how the bidding goes but I will bet it goes to a rival for stock.