Premier Diversified Holdings – CNSX:PDH
Share Price – $0.125 (all figures quoted in $CAN)
Market cap – $18.5mn
Premier Diversified Holdings (formerly Premier Diagnostic Health Services) is a Canadian company that was brought under the control of Sanjeev Parsad in 2014 (he now holds about 1/3 of outstanding stock) after it was brought close to bankruptcy while under previous management. The original business was to provide medical diagnostic services (MRI/CT scans) to patients in two locations (China and Canada). Since 2014 when Sanjeev took charge, the company has raised capital numerous times, closed the Chinese diagnostic centre, and is now a diversified holding company. Despite having a tiny market cap, the stock has gained somewhat of a cult following amongst value investors as Sanjeev is the owner of the popular investing bulletin board, Corner of Berkshire and Fairfax. For those that are interested, a further discussion on PDH is maintained on the forum itself.
There’s essentially two parts to the PDH story.
- The revenue producing part (the medical diagnostics business at Burnaby and China)
- Investments (marketable securities, Sequant Re, Go eVisit, Russell Breweries, and real estate)
Revenue – Diagnostic Clinics
The revenue generating part of the business now consists solely of the Burnaby clinic (the China operation is now closed). For quite some time, the medical diagnostics business has been a problem child for PDH and on initial inspection of PDH’s most recent financials things still don’t look great. Looking at the six month period ending March 31st 2017, the income statement shows operating losses for this business at -$268k for the period (this is before central corporate costs).
Over the long-term, the picture doesn’t look much better for the year end numbers of 2015 and 2016.
Management do seem confident that business will pick up, and the slide from the 2017 AGM deck certainly suggests that operational gearing exists in the business and thanks to high margins, any new business should see a significant drop through to the bottom line.
For me though, the jury is definitely out. We have 6 years of financial data for the business now, and in each year it has generated operating losses. I am certainly no expert in the field of medical diagnostics, but based on past history, it would seem to me that a Herculean effort would be required to get the remaining half of the business cash flow positive. Then there’s the concern that expensive CT/MRI machines need to be replaced. A quick search of Google suggests $1M is a typical enough price for an MRI machine with a lifespan of 10 years. Note that PDH’s machines were bought in 2010, so it would seem at some stage in the not too distant future that they will need replacing.
One final point on the diagnostics business I have not covered. The assets of the closed down Chinese clinic are now carried on the books at marginal value. It seems unlikely that the business in this jurisdiction can be restarted (why would it have been closed down otherwise?), but perhaps a fully functioning, and well equipped diagnostics clinic ready to go could be sold in excess of carried value on the balance sheet? Management have certainly suggested booked asset values at clinics are far below real value.
Since Sanjeev has taken charge, PDH have entered into a variety of other investments.
- Sequant Re
- Russell Breweries
- Kingswood Asset Management
- Go eVisit
- Marketable securities
Sequant Re is PDH’s largest investment to date, and unfortunately for me, I don’t understand it in the slightest! There’s a description of what Sequant Re are offering here. In short, it sounds like Sequant are looking to get into the business of matching re-insurers who wish to collateralise and sell parts of their book to outside investors who wish to either gain exposure to a specific type of insurance risk, or merely seek a given return on their capital. What sort of fees are generated, capital requirements, or fixed costs are needed is completely unknown. All we know is that 5,326,000 are held and carried on the books at $2.27mn.
This is perhaps the easiest investment to evaluate. PDH own 15,256,000 shares (or 17.52%) in Russell Breweries, a listed Canadian brewer that is carried at $1.067mn. The company is currently in the process of being sold off with the proceeds being distributed to shareholders. It’s clear that this carrying value is far too conservative. I estimate the actual value as follows.
- $726.8k cash already received ($0.05 initial distribution x 15.256mn shares)
- $738.2k final liquidation value (remaining equity – minus $200k liquidating costs)
Total value of $1.465mn. Essentially, I would be expecting a gain of about $400k over stated book value.
Kingswood Asset Management
PDH have also combined with Kingswood Asset Management, entering into a partnership to build residential property in Vancouver and its suburbs.
- $375k invested in Bentley in 2015
- $500k invested in Acora in 2016
Management have stated “Sale price per square foot presently is significantly higher than original projections when we initially looked at the investment’s potential”, so it looks like they should be well in the money on their $875k investment, assuming Vancouver prices don’t fall in the meanwhile.
PDH also own just under 30% of an online portal called GoeVisit, which is an online pharmacy that provides free consultations with a physician or nurse. They can diagnose up to thirty conditions and then prescribe medicines, which GoeVisit can then dispense, which presumably is where the revenue in the business is. As of the latest interim statement, $650k has been spent on the stake in this business with no revenue/profit figures yet provided.
All the marketable securities have been sold.
Sum of the Parts Valuation
- Burnaby/China Diagnostics: $2.0mn (assuming only 20% depreciation of equipment values)
- Sequant Re: $2.27mn
- Russell Breweries: $1.45mn
- Kingswood: $1.05mn (assuming a 20% return)
- GoeVisit: $650k
- Current assets – liabilities: -$100k
Total value: $7.32mn or $0.05 a share
- Burnaby/China Diagnostics: $2.5mn (assuming no depreciation of equipment values)
- Sequant Re: $3.4mn (assume 50% increase in value)
- Russell Breweries: $1.45mn
- Kingswood: $1.3mn (assuming a 50% return)
- GoeVisit: $975k (assume 50% increase in value)
- Current assets – liabilities: -$100k
Total value: $9.52mn or $0.065 a share
On a sum of the parts assets basis, even my most aggressive valuation of the company is still only half the current market value. The other thing that’s concerning here is the high corporate expenses. Management have done well in getting them down, but the run-rate is still currently just under $1mn a year. Going from here, management have got to be exceptional if they’re going to overcome this hurdle so value can accrue to shareholders.
I won’t be investing at the current price, but I will be enthusiastically rooting for Sanjeev and the team.