Seeking Alpha • Aug 27
AirSculpt Technologies: Niche Offering Offset By Profitability, Valuation
Summary
AirSculpt Technologies presents with a unique offering with exposure to alternative medical sectors in cosmetics.
The company's growth strategy is well received but comes with notable execution risks.
Shares appear to be reasonably valued at current levels, however, deeper examination of financials places questions on just what we are buying.
With these points in mind, we value AIRS a hold.
Investment summary
AirSculpt Technologies, Inc. (AIRS) has piqued our interest since listing back in FY21. It operates in a novel segment of 'body contouring procedures' and is best known for its AirSculpt procedure, under the subsidiary brand Elite Body Sculpture. The proprietary procedure is touted due to its minimally invasive nature that contrasts to traditional liposuction. Its growth strategy is to open new centres and expand/relocate existing ones, ultimately driving up revenue per case, cases per room and overall case numbers as part of its growth strategy.
Exhibit 1. AIRS 6-month price action
Data: Refinitiv Eikon
Despite the allure, forensics over its financial statements reveal there to be a loose fit to the kind of equity premia we are seeking exposure to in H2 FY22. Valuations are supportive of a neutral view and regulatory headwinds in adjacent markets [Australia, to be specific] has us cautious on the ramifications for global peers. With these points in mind, we rate AIRS a hold.
Q2 earnings indicate growth trends
We see the differentiated strengths of AIRS' procedures in its most recent earnings, with upsides to consensus at the top and bottom lines. Forecasts on the global cosmetic market growth published in April 2022 predict a geometric growth of 3.6% per year from 2021 until 2028. Contrary evidence suggests a 9.6% CAGR into 2030. AIRS printed revenue of $49.7 million for the period, up 42% YoY. Presuming either of the above forecasts are true, then AIRS above top-line growth suggest it gained additional market share during the quarter. As a side note, however, this is a murky segment - recent controversies in the Australian cosmetic surgery market surrounding regulation are a potential risk for global participants.
Cases also increased 22.5% YoY to 3,691 total cases, as seen in Exhibit 2. The company records each case as 1 visit, with doesn't factor in that each patient may have multiple treatment areas per visit. Nevertheless, it opened 4 new centres during Q2 FY21, bringing total centres to 19.
Meanwhile, revenue per case increased 16% YoY to ~$13,450, supported by the company's access to 38 procedure rooms versus 25 the year prior. However, the 10-Q did note that cases per procedure room declined due to the addition of the 13 new centres and expansion of existing ones, versus an organic decline over the 12 months. There is good reason to estimate that trends will normalize as procedures per room level to overall company growth trends.
Exhibit 2. Above-market growth statistics imply the company might be gaining additional market share
Image: HB Insights, AIRS SEC Filings
Despite the upsides in booked revenues for the quarter, our findings indicate there are drains and pulls on liquidity that may place stress on AIRS' current position. As seen below, we estimate there to be around 3-4 quarters of cash runway remaining with the company's most recent earnings. It needs a substantial growth in cash conversion from net income to bolster its position here and prevent additional dilutive equity raise(s) and/or expensive debt issuance/origination in the high yield debt capital markets. Noteworthy to this point, however, is the company declared a $0.41/share special dividend to be paid in September.
Exhibit 3.
Data: HB Insights Estimates
The company also reports non-GAAP EBITDA and recorded a $1.01 million YoY increase to $15.2 million as seen in Exhibit 4. This is despite earnings narrowing by 94% YoY from ~$10 million to $583,000. According to the 10-Q, "management assesses and believes investors should assess our operating performance" [using non-GAAP EBITDA]. We take some issue with this recommendation.
Firstly, the company booked ~$7.3 million in stock-based compensation ("SBC") for the period, and saw an interest expense of $1.5 million - each up substantially on the year. Moreover, as seen below, AIRS asks us to ignore the impact of new centre opening and relocation costs, plus the SBC, plus the loss on asset disposals. We argue these are expenses that must be realized in the analysis of free cash flow and valuation. We can't simply ignore that these 3 expenses in particular total to $9.3 million, and removing them from the equation, non-GAAP EBITDA is ~$5.9 million. Not to mention, it also recorded a $60 million payment to its parent organization. Therefore, whilst it converted $8.5 million in quarterly cash flow, this was more than offset by these expenditures.
Exhibit 4. Non-GAAP EBITDA includes several expenditures that we argue should be included in cash flow analysis
Data: AIRS 10-Q, Q2 FY2022
Valuation
AIRS' growth strategy involves opening de novo centres, expanding existing ones and acquiring additional assets into its portfolio. In that regard, AIRS' corporate value stems from its popular set of procedures - particularly AirSculpt liposuction - as an intangible plus its tangible book value. Any value manager will also familiarize this information with cash flow multiples and forecasts.