recommendation: buy analysts
TRANSCRIPT
2019 Michigan Investment Stock Pitch Competition
Fall 2019
Notre Dame Investment Club presents:
R1 RCM
NYSE: RCM
Recommendation: BUY
Analysts:Zach Margovskiy, Conor Brady, Conor Neal
1
• The hospital industry is growing steadily at 2.4% a year and as they expand and digitize, RCM is poised to
capture the market for hospital health revenue services, and they have been, growing at 11% last year
• R1 is the largest, independent, end-to-end revenue cycle provider in the U.S. with a competitive edge through
their accumulated data and expansive pipeline of existing and potential clients
• Currently undervalued due to overconcerns regarding the lack of profitability and customer concentration,
which are mitigated by a clear path to turning cash flow positive and long-term contracts with customers that
are partial owners
• We believe the market will recognize this mispricing as the RCM industry grows, R1 signs additional big-
name contracts, and analyst coverage grows, with a potential tailwind from changes in healthcare policy
Price Target: $14.84
Implied Upside: 49.76%
Recommendation:
Given R1 RCM Inc.’s (NASDAQ: RCM) market-leading position within a growing industry, it offers an
attractive equity investment opportunity with substantial 2 year upside; therefore we recommend a buy
Investment Thesis
Rationale:
2
3
Explanation of Revenue Cycle Management (RCM)
Advantages of RCM
1. Charge Capture Render Medical services
into billable charges 2. Claim
Submission Submit claims of
billable fees to insurance companies
3. Coding Properly code diagnoses and
procedures
4. Patient Collections Determine
patient balances and collect payments5. Preregistation
Collect information
before patient arrival
6. Registration Collect
subsequent patient
information during
registration
7. Remittance Processing
Apply/Reject payments
through the remittance processing
8. Third-Party Follow Up
Collect payments from third-party
insurers
9. Utilzation Review Examine the necessity of medical services
Revenue Cycle Management (RCM): financial
process, utilizing medical billing software, that
healthcare facilities use to track patient care from
registration and appointment scheduling to the final
payment of the balance
Sources: R1RCM, HeathIT.TechTarget
Efficient:
Allows healthcare
organizations to track
their collection
schedule easier
Saves Money:
Automates duties
previously handled by
employees & collects
revenue quicker
Client Focused:
Saves time for both
the healthcare
organization and
their patients
Preventative:
Healthcare groups
are able recognize
problems before they
occur
R1 has less than 3% market share with $7 billion in NPR
under management and 30 million patient encounters
Overview Revenue Collection Steps
Major Players
RCM Industry Outlook
Sources: MarketWatch, HealthIT.gov, grandview research, Yahoo Finance, CAPIQ
Increased Adoption of Healthcare RCM
Shift from Fee-for-Service to Value-Based Care
• Value-based RCM focuses on quality care at a
reasonable cost over volume-based RCM.
• Ensures physicians are rewarded for quality care.
• Better care for individuales
• Reduced healthcare costs
• Customer satisfaction and retention
Increased healthcare spending and adoption of EHRs will significantly contribute to the growth of the healthcare RCM Market.
Health IT
Secular Pressure
Investments in
infrastructure
Stress has been put on the
industry to run more efficiently
and produce more revenue
Advantages of RCM to the Client
Hospitals have begun to refocus
and invest in RCM and are
increasing focused on outsourcing
Healthcare IT is becoming a key
differentiator for players in the
healthcare industry
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Basic EHR Any EHR
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$10.0
$15.0
$20.0
$25.0
$30.0
2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Mar
ket
Siz
e (B
illio
ns)
4
Industry Trends
Increased Adoption of Electronic Health Records
Sources: RSM 10-K, IBISWorldNote: Market Data as of 10/17/19
Overview
• R1 RCM is the largest, independent, end-to-end revenue
cycle provider in the U.S.
• R1 engages in the provision of revenue cycle management
to healthcare providers – it offers end-to-end, modular
revenue cycle, and physician advisory services
• The Company utilizes a world-class operating system
supported by a fully integrated, proprietary technology
platform
• R1 has had a relationship with Ascension Health since its
founding in 2003, and the Company did not expand to new
hospitals until 2016
Segmented Revenue Breakdown ($mm)
LTM June 30th 2019 ($M)
Sales $868.5
Gross Income 94.9
EBITDA 66.9
EBITDA Margin 7.7%
Cap Ex (33.5)
Net Income (45.3)
Total Cash 64.6
Market Cap 1,111
R1 RCM Company Overview
Revenue has been extremely variable and dependent on historical fees, but
new contracts should decrease volatility and allow consistent growth
Joseph Flanagan
•President and CEO of R1 since 2016
• Joined R1 in 2013 as COO
•Brought 20+ years of management experience
Mary Tolan
•Co-Founder and Managing Partner at Chicago Pacific
•Former CEO & Co-Founder of R1, Current Board Member
•9% shareholder
Neal Moszkowski
•Founder & Co-CEO of TowerBrook
•Board of Director Since 2016
•TowerBrook owns 60% of shares
$0
$200
$400
$600
$800
$1,000
2013 2014 2015 2016 2017 2018
Operating Fee Incentive Fees Other
5
Office Based
Physician
Hospital Based
Physicians
Medical Groups
Key StatsCustomer Groups Properly Aligned Management
Sources: RCM Lender Deck
R1 RCM Company Overview (cont’d)
6
Intermedix Acquisition
7
In February 26th 2018 R1 acquired Intermedix at a valuation of $460 million
Intermedix Overview
• Intermedix served more than 15,000 U.S healthcare providers,
including physicians in hospitals and other healthcare settings
• Healthcare represented 86% of Intermedix revenue prior to the
acquisition
• 4 Billion in net patient revenue under management and over
700 customers
• Has significant investment in data analytics and automation
• Offers a diversified physician RCM revenue profile
Advantages
• When combined the company manages ~$30 billion of annual
net patient revenue (NPR) on its customers’ behalf and has
nearly 1,000 clients in 49 states and Washington, D.C
• Acquired Intermedix’s healthcare division but not the
emergency preparedness division, which turned into an
independent company
• R1 has integrated the technology into its solution offerings and
showed signs of positive growth in recent earnings
Positive Signs of Synergy Accomplishment
• Revenue of $295 Million, up $87.1 million and 41.9% compared
to the same period last year (pre-acquisition).
• Helped R1 become one of the leaders within a fragmented
industry
Deal Overview
Increased Market
ShareFaster Growth
Newer resources
and competencies
Financial GainReduced Entry
Barriers
Loss of a
Competitor
The acquisition of Intermedix provides significant growth opportunity for R1 with both their technology and clients. R1’s revenue
and EBITDA is up in part due to the benefits received from the Intermedix acquisition
• The R1 technology, model and processes have been developed through years of experience working with healthcare organizations
on their most challenging implementations.
• R1 is the market leader in RCM, they’ve have the process and approach down, every other firm would be playing catch up right now
• Their approach and technology are based on standard structures and rigorous methods, tested and proven in multiple organizations
and environments.
• Market Leader Proven Process
Sources: R1RCM
• Comprehensive Gains
• Leveraging the customer’s data, R1’s services are designed to help ensure client economics improve which includes: revenue, profit and
scale
• Increasing EBITDA margins on signed business, 2018: 6.5%, 2019: 13.5%, 2020E:19%
• Predicting $3B in NPR in 2019, helped by $1.4B contract with Quorum
• Client Signings growing, from $30B Q4 2018, to $31B Q2 2019, to projected $33B in Q4
• Dimensional Visibility
▪ R1 enables timely defect intervention and recovery workflow by providing a clear window into revenue operations with frequent
and comprehensive reporting.
▪ Limited chance of fraud or improper use or distribution of data with everything so visible
• Proprietary Technologies
▪ R1 Hub technologies integrate across multiple host and payor systems. They are designed to scale and perform in the
largest, most complex systems to enable end-to-end process integration.
▪ No other business has the technological advantage in RCM that R1 does
• Analytics & Accountability▪ R1 uses hundreds of measurement methods to drive comprehensive daily accountability designed to identify and correct small
issues before they become organizational problems.
▪ Already have data to improve business model, been in operation for years so have competitive advantage in using and
optimizing clients data
With the R1 Performance Stack℠, the company believes that it is uniquely equipped to manage the revenue cycle from end-to-end
5 Advantages to R1’s revenue cycle management
8
Key Catalysts
Sources: S&P Capital IQ, RCM 10K, Baird Equity Research
Lack of Analyst Coverage
Growing Industry: Hospital RCM Outsourcing Survey• The market is taking time to understand RCM potential for growth
based on the size of the industry due to the concern of unprofitability
• “Wait and see approach” amongst larger investors is occurring
• Stock down over 20% mostly on non-fundamental issues, mainly due to
a sector rotation away from growth and toward value-based stocks
based on global market concern
• Capital Structure is unique – 45% of the company is represented by a
convertible note with three of their biggest clients
Expected Revenue Growth
Market Preference for Profitability
5% 6%
68%
17%
24%
59%
27%
39%35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Current OutsourceRCM
Plan to Outsource toRCM in the Future
Do Not Plan toOutsource RCM
2016 2017 2018
9
Firm Analyst TGT Price 1 Yr Return
Cantor Fitzgerald Steven P Halper $14 13.6%
Cowen Charles Rhyee $14 13.6%
KeyBanc Cap Markets Donald Hooker $14 13.6%
Baird Matthew Gillmor $14 13.6%
Chardan Cap Markets Steven Wardell $15 13.6%
($85) ($85)
$177
($59)($19)
$36 $65 $87 $106 $128 $146
($120)
($20)
$80
$180
$280
• There are currently only 5 analysts covering the stock on Bloomberg –
we believe that additional analysts will initiative coverage as the RCM
market grows and R1 wins additional contracts
• As seen below, most analysts are optimistic on the stock, so we think
this could draw-in institutional money and drive the price up over time
• Recently won contracts with Quorum Health and Amita Health, driving
up management guidance in recent quarters
• Management has hinted at a large pipeline close to signing
$869 $1,042
$1,230 $1,427
$1,641 $1,878
$2,141
0%
5%
10%
15%
20%
25%
- -
$500
$1,000
$1,500
$2,000
$2,500
2018A 2019E 2020E 2021E 2022E 2023E 2024E
Sources: RCM 10k, S&P Capital IQ, Morningstar, Baird Research
⮚ R1 is the Lead Provider in the RCM Space
▪ They are distinguished by their larger source of data
through a long history within the industry
▪ The management team is world-class and will ensure
the Company continues to grow through new
relationships
⮚ The Company Will Turn Cash Flow Positive in FY’19▪ Historical losses were driven by fixed costs that are
dwindling due to economies of scale as the Company
wins new contracts
▪ Concerns regarding integration of Intermedix are
overblown, as recent earnings have shown an ability to
easily integrate this acquisition
⮚ Clients Share Aligned Interests
▪ Customer concentration is expected to come down as the
Company wins new contracts
▪ These clients are also locked up in 10-year contracts, with
limited ability to exit said contracts
▪ Ascension owns an equity stake in R1
⮚ Unable to Win New Contracts
▪ Risk if customers begin to cancel or not re-up their
subscriptions
▪ Also, if R1 cannot secure more contracts, they risk
their growth suffering
⮚ Lack of Profitability▪ Incurred losses most years besides 2016, mainly
in acquisition and integration costs
▪ Intend to increase services in next year to expand,
will also increase operating revenues by attracting
more businesses with increased offerings
▪ Path to profitability involves adding more clients
which will come with increased service
⮚ High Client Concentration
UpsideRisks
▪ Ascension, Intermountain, and Presence Health will
represent the vast majority of revenue through 2020
▪ These firms have signed exclusive 10 year agreements
with R1, however, so recontract risk is not an issue
Key Risks & Mitigants
10
Notre Dame Investment Club recommends a BUY for R1 RCM, with the expectation that as the
Company continues to grow earnings and eliminate losses behind new customer contracts
FinalPrice Target: $14.84
Upside: 49.76%
Final Recommendation
11
• The hospital industry is going to grow steadily over coming years and RCM demand, specifically, will be bolstered
by the implementation of IT Healthcare
• R1 has a competitive advantage over competitors driven by its accumulation of data, which will only grow and
create a flywheel as the Company expands
• The Company is expected to turn cash flow positive in FY’19 driven by economies of scale and limited
integration costs
• The market will recognize R1’s success as the industry grows and contracts continue to funnel in, leading to
increased analyst coverage, higher institutional ownership, and stock price appreciation
APPENDIX
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NASDAQ:RCM 1 Year Stock Chart
Comparable Companies
14
Market Cap Enterprise Value Projected 1-Year Growth Margins Turnover
(USDmm) (USDmm) Revenue EBITDA EPS Gross EBIT EBITDA Net Income Asset Inv.
Allscripts Healthcare Solutions, Inc. $1,845 $2,669 6.6% 185.8% (1,326.7%) 47.6% 1.6% 6.6% (0.6%) 0.5x 3.2x
HCA Healthcare, Inc. 41,873 77,435 9.7% 8.8% 47.9% 37.8% 14.3% 19.3% 5.4% 1.2x 7.1x
Tivity Health, Inc. 802 1,915 55.2% 46.2% 19.0% 35.0% 19.3% 21.0% 9.6% 0.6x 10.6x
Cigna Corporation 62,219 98,479 43.0% 29.3% 54.1% 20.3% 6.8% 8.7% 3.7% 0.9x 34.1x
NextGen Healthcare, Inc. 1,063 1,095 2.5% 156.4% 306.3% 58.4% 4.6% 7.2% 2.6% 1.0x 5.5x
R1 RCM Inc. $1,111 $1,730 24.6% 165.1% 4,585.9% 14.7% 4.0% 8.7% 0.1% 1.3x 14.2x
75th Percentile $41,873 $77,435 43.0% 156.4% 54.1% 47.6% 14.3% 19.3% 5.4% 1.0x 10.6x
Mean 21,560 36,318 23.4% 85.3% (179.9%) 39.8% 9.3% 12.6% 4.1% 0.8x 12.1x
Median 1,845 2,669 9.7% 46.2% 47.9% 37.8% 6.8% 8.7% 3.7% 0.9x 7.1x
25th Percentile 1,063 1,915 6.6% 29.3% 19.0% 35.0% 4.6% 7.2% 2.6% 0.6x 5.5x
Protifability Ratios EV / Revenue EV / EBIT EV / EBITDA P/E
ROA ROE ROC LTM FY'20 LTM FY'20 LTM FY'20 LTM FY'20
Allscripts Healthcare Solutions, Inc. 0.5% (14.0%) 6.6% 1.5x 1.4x 94.7x 13.3x 22.9x 8.0x NM 14.5x
HCA Healthcare, Inc. 10.5% NM 9.6% 1.6x 1.4x 11.1x 10.2x 8.2x 7.6x 16.0x 10.8x
Tivity Health, Inc. 7.6% 18.0% 7.2% 2.2x 1.4x 11.6x 8.2x 10.6x 7.3x 8.7x 7.3x
Cigna Corporation 4.0% 12.6% 7.1% 1.0x 0.7x 14.1x 11.0x 11.1x 8.6x 13.6x 8.8x
NextGen Healthcare, Inc. 2.7% 6.4% 5.6% 2.1x 2.0x 45.2x 38.4x 28.6x 11.2x NM 19.1x
R1 RCM Inc. 3.2% (10.8%) (3.8%) 1.6x 1.3x 40.2x 11.1x 18.4x 6.9x NM 16.9x
75th Percentile 7.6% 14.0% 7.2% 2.1x 1.4x 45.2x 13.3x 22.9x 8.6x 14.8x 14.5x
Mean 5.1% 5.7% 7.2% 1.7x 1.4x 35.3x 16.2x 16.3x 8.5x 12.7x 12.1x
Median 4.0% 9.5% 7.1% 1.6x 1.4x 14.1x 11.0x 11.1x 8.0x 13.6x 10.8x
25th Percentile 2.7% 1.3% 6.6% 1.5x 1.4x 11.6x 10.2x 10.6x 7.6x 11.1x 8.8x
Implied EV (75th Percentile) $2,248 $1,953 $1,943 $2,063 $2,161 $2,139
Implied EV (Mean) 1,816 1,893 1,519 2,518 1,535 $2,126
Implied EV (Median) 1,719 1,942 605 1,704 1,043 $2,004
Implied EV (25th Percentile) 1,652 1,931 498 1,581 1,000 $1,890
Implied Share Price (75th Percentile) $14.83 $12.15 $12.05 $13.15 $14.04 $13.84 $8.67 $8.53
Implied Share Price (Mean) $10.90 $11.60 $8.19 $17.29 $8.34 $13.72 $7.47 $7.10
Implied Share Price (Median) $10.02 $12.04 ($0.12) $9.88 $3.87 $12.61 $7.96 $6.34
Implied Share Price (25th Percentile) $9.41 $11.95 ($1.10) $8.76 $3.47 $11.57 $6.53 $5.17
Company Name
Company Name
WACC
15
Capital Structure
Debt-to-Total Capitalization 64.02%
Equity-to-Total Capitalization 35.98%
Cost of Debt
Cost of Debt 6.04%
Tax Rate 21.00%
After-tax Cost of Debt 4.77%
Cost of Equity
Risk-free Rate(1) 3.00%
Market Risk Premium(2) 8.00%
Levered Beta 0.86
Cost of Equity 9.88%
WACC 6.61%
Valuation DCF
16
FYE December 31, FYE December 31,
($ in millions) 2014A 2015A 2016A 2017A 2018A 2019E 2020E 2021E 2022E 2023E 2024E
Total Revenue $210.1 $117.2 $592.6 $449.8 $868.5 $1,042.2 $1,229.8 $1,426.6 $1,640.5 $1,878.4 $2,141.4
Revenue Growth -- (44.2%) 405.6% (24.1%) 93.1% 20.0% 18.0% 16.0% 15.0% 14.5% 14.0%
Expenses
COGS 182.1 169.0 199.7 416.3 770.6 812.9 934.6 1,069.9 1,230.4 1,399.4 1,595.3
Gross Profit $28.0 ($51.8) $392.9 $33.5 $97.9 $229.3 $295.2 $356.6 $410.1 $479.0 $546.1
Gross Margin 13.3% (44.2%) 66.3% 7.4% 11.3% 22.0% 24.0% 25.0% 25.0% 25.5% 25.5%
SG&A 74.9 75.0 74.1 56.3 97.9 130.3 147.6 171.2 188.7 216.0 246.3
Other 86.8 9.3 20.8 4.7 30.4 52.1 61.5 71.3 82.0 93.9 107.1
Operating Expenses 161.7 84.3 94.9 61.0 128.3 182.4 209.1 242.5 270.7 309.9 353.3
Operating Income (EBIT) ($133.7) ($136.1) $298.0 ($27.5) ($30.4) $46.9 $86.1 $114.1 $139.4 $169.1 $192.7
EBIT Margin (63.6%) (116.2%) 50.3% (6.1%) (3.5%) 4.5% 7.0% 8.0% 8.5% 9.0% 9.0%
Income Tax Expense (24%) -48.7 -51.6 121.1 31.5 -11.4 11.3 20.7 27.4 33.5 40.6 46.3
EBIAT ($85.0) ($84.5) $176.9 ($59.0) ($19.0) $35.6 $65.4 $86.7 $106.0 $128.5 $146.5
Cash Flow
Plus: D&A 6.0 8.5 10.2 16.3 38.8 62.5 73.8 85.6 98.4 112.7 128.5
Discretionary Cash Flow -79.0 -76.0 187.1 -42.7 19.8 98.2 139.2 172.3 204.4 241.2 275.0
Less: Increase in NWC 84.0 33.0 (99.0) (60.0) (16.0) (11.2) 1.9 2.8 4.3 3.9 5.1
Less: CapEx 0.0 (20.0) (8.0) (33.0) (74.0) (82.6) (97.5) (113.1) (130.1) (148.9) (169.8)
Free Cash Flow $5.0 ($63.0) $80.1 ($135.7) ($70.2) $4.4 $43.6 $62.0 $78.6 $96.1 $110.3
Free Cash Flow Growth -- (1363.4%) (227.1%) (269.4%) (48.3%) (106.3%) 894.1% 42.0% 26.9% 22.3% 14.8%
Unlevered Free Cash Flow
WACC 6.61%
Discount Period 0.2 2 3 4 5 6
Discount Factor 0.99 0.88 0.83 0.77 0.73 0.68
Present Value of Free Cash Flow $4.3 $38.4 $51.2 $60.9 $69.8 $75.1
Valuation DCF- (Base)
17
DCF Sensitivity Analysis
WACC
15.50 4.6% 5.6% 6.6% 7.6% 8.6%
6.0x $13.24 $12.39 $11.60 $10.86 $10.16
7.0x $15.42 $14.46 $13.55 $12.70 $11.90
EV/EBITDA 8.0x $17.61 $16.52 $15.50 $14.54 $13.65
9.0x $19.79 $18.58 $17.45 $16.39 $15.39
10.0x $21.98 $20.65 $19.40 $18.23 $17.14
Enterprise Value DCF Sensitivity Analysis
Cumulative Present Value of FCF $299.7
Terminal Value
Terminal Year EBITDA $321.2
Exit Multiple 8.0x
Terminal Value $2,577.9
Discount Factor 68.12%
Present Value of Terminal Value $1,756.0
% of Enterprise Value 85.4%
Enterprise Value $2,055.7
DCF Implied Equity Value and Share Price
Enterprise Value $2,055.7
Less: Total Debt $396.6
Plus: Cash & Cash Equivalents $80.1
Implied Equity Value $1,739.2
Implied Share Price $15.50
Shares Outstanding 112
Method Weight Price
Comparable Companies 50% $14.18
DCF 50% $15.50
Fair Value Estimate $14.84