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Date : 29/07/2021

Doctor Care Anywhere

ASX :

DOC

Market Cap : $275.72 Million

Buy

52 Week Range : $0.75 - $1.52

Share Price : $0.80

Excellent growth metrics and competitive advantages supporting long-term growth. A "Buy" from us.

Company Analysis

One of the most interesting recent IPOs at the end of last year was Doctor Care Anywhere’s (ASX: DOC) debut on the ASX. DOC operates a telehealth service in the United Kingdom. It is a very interesting company, quite unique since DOC positions itself at the crossroad of healthcare and technology. By investing in DOC, you can benefit from the defensive nature of the healthcare sector while capturing growth from the tech sector. In our opinion, these kinds of businesses can be very lucrative if they reach maturity. DOC attracted a lot of attention in the community of traders and investors, which sent the company’s share price all the way up from its IPO price of 80 cents to slightly above $1.50 per share, an 89% rise in just a few weeks. DOC share price went back to its mean level since then, at a tad above the IPO price which might present an opportunity to get some shares at a relatively fair value.

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Source: Tradingview.com

The future of healthcare services

If we look at the US business Teladoc Health Inc (NYSE: TDOC), which has a similar business model and profile to DOC, we can see the growth opportunity that we can potentially capture from this relatively new industry. While Teladoc is not profitable yet, the firm has however expanded remarkably well and now facilitates more than ten million doctors’ appointments per year bringing revenue of over a billion US dollars annually. Teladoc since its debut on the stock exchanges five years ago has now witnessed its share price almost quadruple. And there is no doubt that the concept of telehealth makes sense in many scenarios.

Up until the first outbreak of COVID-19, there has not been much growth in the telehealth sector in countries where public healthcare is extensively provided such as in the UK and Australia. At that time, the government did not necessarily realise the benefit of such a concept and has not been motivated to unlock the cost efficiency savings arising from telehealth. The pandemic brought the concept of telehealth to the spotlight, and since then, a plethora of doctors are starting to provide some sort of telemedicine. Many doctors in the UK are now using software called accuRX for their video consultations. Telemedicine has arrived in a big wave, however, there is no clear market leader defined yet and while DOC has competitors, the company has been a beneficiary of the industry tailwinds. From 2018 to 2019, DOC has seen its number of consultations grow at an impressive CAGR of 65%. COVID-19 has even accelerated the adoption of telemedicine which increased by more than threefold last year.

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Source: Doctor Care Anywhere

Doctor Care Anywhere: An interesting business model

DOC has quite an interesting business model which we are persuaded is poised for growth if the execution is done properly. The company has been partnering with AXA Group (MIL: AXA) which is among the top three largest insurance companies in the world. Along with AXA, DOC is also in partnership with various healthcare providers, such as the hospital operator Nuffield Health, which offer employers healthcare packages that they can provide to their employees.

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It is estimated that 10% of the eligible users will become actual DOC users. The advantage of this model is that DOC can acquire customers at a fairly cheap rate. Essentially, DOC services become an inclusion in another company’s offering. DOC has two distinct revenue models. The first one consists of “paid per consultation” and the second one is revenue derived from “paid per eligible patient” which is in this case healthcare packages paid by employers for their employees. Offsetting this, DOC operating costs involve the fee of employing the doctors, implying that the company’s revenue is not as we could think of as a platform provider but instead a service provider. As you may have guessed, there is one big disadvantage to this model, and that is the high dependencies DOC has on its large partners, in this case with AXA. However, the benefits outweigh the costs here. Or rather, the reward is extremely high for the level of risk taken.Private medical insurers have all started partnering with telehealth providers in the UK. This is a tremendous advantage because it delivers a massive flow of patients to them.

After the IPO, DOC had £45.2 million available in cash which was about $80 million at that time, giving an enterprise value of approximately $400 million. As we said, DOC is a service provider, however, the firm exhibits similar revenue features of a software company, since income represents what DOC gets after the salaries and other operating expenses related to costs of doctors who deliver the telehealth services. The company has reported an increase of 30.7% year-on-year in its gross profit which was near £5.7 million or $10.7 million. DOC’s earnings growth is impressive, but still, the company is trading on a 19.3 times EV/revenue as of the end of December 2020. Despite a high multiple, according to our analysis, we think that it is still reasonable for DOC as we forecast an EV/revenue which will be more in line for 2021 at a rate of 5.66 times. Hence, we believe at the current price near DOC’s IPO price of 80 cents per share might be a fair value. DOC has reported a strong commitment to further reducing its gross margin as it has expanded into some specialist services which are currently sub-scale. The company has also adjusted its length of consultations from fifteen minutes to twenty minutes. That said, in our view, we could expect a stabilisation of the gross profit margins and even though an improvement over time. When it comes to earnings, the outlook is very positive in our opinion. Still, we must see if the pandemic has created a lasting acceptance of telemedicine and emerge as a mainstream service. If our thesis proves to be true, that could set the stage for multiple years of strong earnings growth.

Company Updates

FY22 Outlook: Insurers’ profit incentive to drive volume to DOC

The DOC growth plan is rather simple yet effective. The idea is to capture various revenues within different parts of the patient journey. At the current “early stage”, DOC is mainly collecting revenue through either a utilisation-based model or a subscription model for its Virtual General Practice consultation (VGP) and its specialist reviews. Furthermore, DOC is also collecting license fees which are charged along the way through its partnerships and joint venture channels such as with AXA.

DOC’s December 2020 IPO saw the firm raise $102 million in total proceeds at an 80 cents issue price, of which $65 million were received by the company. The remaining $37 million went to long-term shareholders, which sold off a part of their holdings. It is worth noting that none of the company’s board of directors or senior management team sold any shares as part of the IPO. Management, as well as the remaining interest held by major pre-IPO investors, are subject to a 24-month lock-in from the date of listing until early December 2022.

In our view, DOC appears to be well-funded for further growth with at least $18 million available in working capital along with steady revenue growth of +184% and +102% in 2019 and 2020, respectively.

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Market penetration via partnerships

DOC’s cost of customer acquisition is relatively cheap. The company’s route to market is via its channel of relationships which is much more affordable than in the case of a direct business to consumer model. DOC has developed an impressive list of partners comprising major global health insurers such as AXA, Allianz, and large healthcare providers such as HCA Healthcare and Nuffield Health, through which the company is providing its telehealth services.

Allianz and AXA are in the top three of the largest insurers in the world. DOC is servicing over 1,500 corporate clients and had a base of 2.2 million patients at the end of last year. AXA and DOC have been in partnership for quite some time, since 2015 when both companies established a commercial relationship. This successively led to a joint venture in the UK between AXA Health and DOC early last year and the launch of the “Internet Hospital” in April 2020. Given DOC’s participation in the UK joint venture, the company has access to an exclusive relationship with AXA which prevents it from working with other health insurers in the UK. However, this does not avert DOC from partnering in the UK with various healthcare providers such as HCA and Nuffield or other avenues such as retail pharmacies.

Apart from continuing to develop its additional pathways and services such as “mental health” and “virtual specialists”, DOC considers its next step toward growth via expanding its footprint to other geographies, in the Asia-Pacific region as well as continental Europe. One thing that we found very creative is the idea to leverage the available data to develop potential new value streams such as the “Health Analytics” and “virtual clinical services”.

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Source: Doctor Care Anywhere

What we also like about DOC, is that it seems that the company is in a potential “massive growth” sweet spot. Hence, we think that the partnership between DOC and AXA is a win-win situation. AXA has the profit incentive to drive huge volume to DOC while DOC contributes to cut AXA’s costs. Such dynamism could literally support a triple-digit gross profit growth rate in 2021 onwards. After all, telehealth is radically more efficient and cost-effective and we believe it won’t be that long before we see a huge increase in the practice.

Investment Thesis

The five key components to DOC’s growth strategy

DOC was founded precisely to tackle the fragmentation found in the health systems globally, which leads to cost inefficiencies and poor patient outcomes. The business model is quite clever, which involves the company providing health insurers with a reduction in claims costs of up to 20% by joining up primary and secondary care, thus reducing unnecessary appointments and diagnostic tests. In the long run, DOC’s strategy is to move towards “total care” by capturing a greater portion of the care pathway. DOC plans to do this by developing and optimising treatment pathways across its seven medical specialities and expanding into other areas, combining primary care and secondary care, acute and chronic conditions, physical and mental health management. The company has detailed five key areas of growth:

  1. Increase customer activation and consultation: DOC plans to boost revenue by expanding its marketing to drive customer activation and consultations, by working on joint promotional campaigns with channel partners and corporate clients.
  2. Develop new service offerings: The company plans to promote its Mental Health services, which launched in November 2020, to its channel partners and corporate clients. Mental health services have a proven demand, with over 10% of existing DOC patients having mental health issues.
  3. Expand its footprint Internationally: DOC is in talks with several health insurers to roll out its Internet Hospital service across various European markets, including Belgium, Germany, Italy, Spain and Switzerland. DOC has indicated that it could look to M&A as a springboard in Europe, in addition to an organic build-out of operations. Asia-Pacific is another area that management believes is ripe for expansion, with the company exploring several opportunities in the region, including Australia. Like Europe, DOC is open to M&A to supplement an organic rollout in Asia-Pacific.
  4. Develop its technology platform further: DOC plans to increase the capacity of its technology platform to increase its ability to handle future volume growth. Additionally, it plans to invest in further developing its EHR to substantially expand its functionality and expand the range of services that can be conducted online.
  5. Improve its operational efficiency: DOC plans to invest and use more automation of workflows across its operations to increase operational efficiency, which will lead to a better patient experience.

Solid management team

As it is often said, “ideas are worthless, execution is everything”. And actually, it is even more important given the low margins and niche market environment DOC is evolving in. But we should not be too worried about that as the company has an experienced and talented management team. DOC’s executive board consists of co-founder and CEO Dr Bayju Thakar and Chairman Jonathan Baines. Dr Bayju is a medical doctor and previously worked at McKinsey & Co. Bayju co-founded DOC and has been crucial to the company’s growth into an integrated digital healthcare provider. Jonathan Baines has served as chairman since November 2018 bringing extensive board and governance experience to the company. Both of them have built up a solid executive management team which we believe has all it takes to support the development and the company’s strategic growth plan.

Huge adoption of telehealth to drive DOC’s massive earnings growth

DOC is supported by an emerging sector that is on the verge of explosive growth. Thus, the global telehealth market is projected to expand at a CAGR of +23% from $4.75 billion to $20.21 billion throughout the next three years. The acceleration of telehealth growth was primarily induced by COVID-19 which significantly impacted consumer habits. Despite industry estimates varying greatly, the consensus that telehealth is poised for higher adoption and robust growth remains broadly consistent. The key growth drivers for increased telehealth adoption and growth are due to an increased prevalence of chronic diseases, long waiting times at hospitals, a greater need for cost-saving in healthcare, a growing number of smartphone users and the advances in communications technologies. By region, America is the largest telehealth market, accounting for 66% of the total market as of 2019, followed by Europe, the Middle East, and Africa at 21% and Asia with 13%. Although the ranking of the three regions will likely remain unchanged, rapid growth in Asian telehealth sees the region increase its share of the global telehealth market to 19% by 2024 from 13% in 2019. The anticipated relaxation of regulation within many European countries over the next few years and improved access to care from remote areas are key drivers for the adoption of telehealth within the region, with the European market increasing from $1.35 billion in 2019 to more than double to $4.0 billion by 2024.

DOC’s first full-year results showed a company that grew swiftly in FY20 with revenue and headline KPIs up by over triple-digit compared to 2019. We were also impressed by DOC’s second-half result which outperformed by far the company’s guidance provided to investors in its IPO prospectus. DOC saw its revenue increase by an impressive 102% year-on-year to £11.6 million in FY20 which is 6% ahead of the prospectus forecast of £10.9 million. The better numbers were driven by higher-than-expected utilisation consultations.

  1. Utilisation revenue increased 359% year-on-year to £9 million and accounted for 78% of DOC’s revenue compared to 34% in FY19.
  2. Consultations increased by 306% year-on-year to 214.7 thousand activated lives which grew by 199% year-on-year to 432.5 thousand.
  3. Eligible lives increased 186% to 2.2 million at the end of 2020. Subscription eligible lives increased by 82% year-on-year to 181 thousand at year-end 2020.

DOC exhibits a rock-solid balance sheet fully funded for growth

On top of a strong earnings growth, DOC also exhibits a rock-solid balance sheet. The company ended 2020 with a net cash position of £38.4 million and zero debt, benefiting from £31.2 million net proceeds after IPO expenses and fees from its December 2020 IPO. According to our analysis, we conservatively agree that DOC is fully funded at least until the end of FY22. We might see DOC attempting to raise capital to fund its ambitious strategic growth plan, not before early FY23. Moreover, we are projecting a net cash position of about £19 million at the end of FY21 and £6 million by the end of FY22.

Revenue forecast and valuation

Since the last three years, DOC has been doing extremely well with consistent gross profit growth, almost at a CAGR of 70% between 2018 and 2020. As we are adopting a conservative approach in our analysis, we are estimating DOC’s gross profit growth to likely stay at a more reasonable compound annual growth rate superior to 25%. We also anticipate that the gross profit margin will remain stable above 21% over the next three years.

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On the valuation front, DOC’s EV/revenue is currently estimated at around 5.66 times which is reasonable. Furthermore, we are projecting DOC’s FY23 EV/EBITDA to reach 42.5 times which attest to the phenomenal growth potential that the company could offer.

Technical Analysis

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Trend

DOC has made an impressive bull-run straight after its IPO, appreciating by more than 89% in just a few weeks. The share price rallied all the way up from 80 cents to $1.5 before heading back to its IPO price which is now the current floor. DOC tested three times the 80 cents level and had slightly rebounded from it recently, before consolidating 7.5 cents above the support level. DOC might be at a turning point as confirmed by the share price jumping above the 20-period exponential moving average. Furthermore, the RSI/price action divergence may also suggest an imminent trend reversal that could take place progressively in the next month. On the upside, the $1 – $1.1 range represents the psychological near-term resistance. We are convinced that if a clear breakout of this level occurs, DOC will likely rally back to its all-time high above $1.5 per share. On the other hand, if DOC could not find enough support underneath at its key level of 80 cents, DOC might be vulnerable to a sell-off which could push the share price to the next support level at 75 cents per share.

Key price levels

The key level to observe is the 80 cents per share which we believe is a strong near-term level and the current floor. DOC’s share price might consolidate in the 80 cents – 90 cents range before attempting any strong recovery.

Volume and momentum

Volume decreases since the last 200-day with the 20-day volume average down by -72.5%. The price action remains neutral in the near term, evolving in a range between 80 cents and 91.5 cents per share.

Trade consideration

  • Market participants might be interested to enter at the key support level of 80 cents per share.
  • Primary target price above $1.50 per share
  • It is recommended exiting the trade below 75 cents per share

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Recommendation

DOC has an interesting business model. The company’s route to market is via its relationships channel with the world’s top insurers which provide a cost-effective approach to acquire a huge customer base. DOC has developed an impressive list of partners comprising major global health insurers such as AXA, Allianz, and large healthcare providers such as HCA Healthcare and Nuffield Health, through which the company is providing its telehealth services. Furthermore, DOC is supported by an emerging sector that is on the verge of explosive growth. Thus, the global telehealth market is projected to expand at a CAGR of +23% over the next three years. The acceleration of telehealth growth was primarily induced by COVID-19 which significantly impacted consumer habits. Despite industry estimates varying greatly, the consensus that telehealth is poised for higher adoption and robust growth remains broadly consistent. We have been also impressed by DOC’s first full-year results that showed a company that grew swiftly in FY20 with revenue and headline KPIs up by over triple-digits compared to 2019. On top of a strong earnings growth, DOC also exhibits a rock-solid balance sheet. The company is also supported by an emerging and nascent market, consistent earnings growth, and ample liquidity; thus, we think that DOC is the perfect play at the intersection of healthcare and technology. A “Buy” recommendation from us.

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