Stars align for Constellation Healthcare

The advent of the US's Affordable Care Act has complicated healthcare organisations' pricing, payment and insurance practices, prompting growing numbers to offload these tasks to billing specialists. But this outsourcing model has begun to creak under the volume and complexity of the work. Constellation, already one of the largest players in this fragmented and challenging market, now plans to push its advantage by buying up smaller billers then outsourcing non-client-facing operations to India. That will slash its costs due to lower local wages, strengthen its market position and fuel profit growth.

Those ambitions are underpinned by Constellation's market-leading, proprietary billing and management platform. It developed the technology following its purchase of Orion Healthcare in 2013, and believes it can expand its existing user base of 3500 doctors 10-fold. Constellation's December Aim listing at 135p secured $13.5m (£9m) in funds for its acquisitive strategy, which will aim to buy quality companies for 5 to 9 times cash profits. It believes the burgeoning billings market for physicians, which is expected to grow at about 7 per cent a year due to an aging population, is currently worth around $37bn, 45 per cent of which is currently outsourced.

Constellation estimates that it can move the jobs of between half and four-fifths of the staff in each company it purchases to India. That underpins its goal of on average tripling cash profits for each acquisition. It has proven the strategy is viable with the Orion acquisition - cash profits tripled in the year to end-June 2014. It has also signed six non-binding letters of intent, which bodes well for further acquisitions. If Constellation fully invests its cash pile, broker finnCap thinks earnings per share could increase by around 69 per cent annually in the three years to 2016, although, this is not fully factored into the broker's current forecasts. Still, finnCap expects cash profits to surge 26 per cent to $17m in 2015, then a further 9 per cent in 2016. It also expects the dividend to more than double this year to 6.9¢ followed by 7.6¢ in 2016 - a 3.5 per cent yield.

Investors should note that founder and chief executive Paul Parmar owns more than four-fifths of Constellation’s shares, limiting the free float and other shareholders' influence. Competition may be another concern; healthcare giant McKesson (US:MCK) has a medical billing division, and both Athenahealth (US:ATHN) and privately-owned Zotec Partners are rivals in the industry. While doctors tend to stick with their suppliers, client losses could be painful for Constellation as Orion’s client base is skewed towards several large customers.