Why Insiders and Funds are Betting Big on Optima Health
Update on Optima health.
Today, we revisit Optima Health, an occupational healthcare company recently spun off from Marlowe at an attractive valuation. This update will cover two recent acquisitions, a significant contract expected to increase revenues by approximately 30%, and an updated valuation that suggests a potential doubling of the share price within the next three years based on current contracted revenues. Additionally, we now have greater clarity on the company's long-term acquisition strategy so we will try to value the company for the next decade based on their mid to long-term targets which would imply a 6x increase in the share price.
The thesis is straightforward: Optima Health is a dominant player in a growing but fragmented occupational healthcare market, beginning to capitalize effectively on its extensive data, scale advantages, and ongoing investments in software and artificial intelligence (AI) to drive operational efficiency.
We observe significant confidence from insiders and institutional investors, evidenced by substantial recent purchases. Notably, during the demerger process, insiders invested approximately £2 million at a price that represents a premium of about 40% above today's share price, further underlining the perceived undervaluation and future growth potential of the company.
Check out my full thesis on the company if you have not read it yet:
Acquisitions:
We have recently observed two acquisitions made by the company. Below, we examine and analyze each of them to understand their expected returns and assess whether the company is effectively executing its strategic plan.
Acquisition of BHSF Occupational Health
Optima Health has agreed to acquire BHSF Occupational Health Limited for £1.4 million on a cash-free, debt-free basis. BHSF Occupational Health Limited generates approximately £8 million in annual revenue and brings an additional 60 experienced occupational health clinicians to the Optima Health team. This acquisition will expand Optima's customer base and enhance its clinical capabilities. The acquired company currently produces £3 million in gross profit.
However, BHSF Occupational Health Limited presently reports a loss of £0.3 million after corporate overheads, which Optima Health intends to eliminate. Optima expects the acquisition to be EBITDA-accretive within the first year. If Optima Health successfully achieves its target of a 20% EBITDA margin for the combined business, it implies the acquisition was made at an EV/EBITDA multiple of less than 1, demonstrating substantial potential for value creation through strategic M&A.
Acquisition of Cognate Health – entering a new geography
Cognate is an occupational-health services provider based in the Republic of Ireland. The acquisition price is up to €9 million on a cash- and debt-free basis, comprising €7 million in cash, plus earn-outs of up to €2 million linked to meeting financial targets over the next two years.
The acquisition was completed at an attractive multiple of approximately 8 times profit before tax (PBT), excluding earn-outs. Considering the earn-outs are tied to increased profitability, the effective multiple could decrease further. This represents a strong expected return, as Optima Health is acquiring a profitable business in a new geography at a compelling valuation, even before accounting for potential synergies.
Armed Forces Contract
Optima Health has secured a significant contract valued between £210 million and £290 million under the AFRS agreement, spanning seven years with an option for an additional three-year extension. The 21-month mobilization phase begins in April 2025, with the full service expected to launch in early 2027.
Optima Health has been selected as the exclusive medical assessments provider for TEAM Serco, the winning consortium for the UK Ministry of Defence's Armed Forces recruitment contract. This joint recruitment service covers the Royal Navy, British Army, and Royal Air Force, further cementing Optima Health’s leading role in corporate health and wellbeing solutions.
Hedge Funds Increasing Positions
Three hedge funds have been quietly increasing their positions in the company, taking advantage of the recent market downturn caused by tariffs and broader macroeconomic concerns. Additionally, Michael Ashcroft—one of the wealthiest individuals in the UK with an estimated net worth of £2 billion—already holds a substantial position in the company and has continued to add significantly to this investment.
Another positive signal I have identified is strong insider confidence regarding the company's future performance. Recently, management demonstrated this confidence by collectively investing approximately £2.0 million, purchasing 772,489 shares at a price of £2.56 each.
Near-term growth and catalysts.
Currently, the business has a strong new-business pipeline amounting to £11.5 million in annualised revenue, on which it is actively working alongside renewals with existing customers through both bilateral agreements and competitive retenders.
The recently announced changes in the UK Autumn Budget 2024 regarding employers' National Insurance contributions are expected to impact margins in the short term. However, we remain confident that these additional costs can be mitigated in the medium term through a combination of price adjustments and enhanced operational efficiencies.
Overall, we anticipate a slight decrease in revenue for 2025 compared to 2024, although we expect to see early indications of revenue improvement through upcoming guidance provided by the company. Additionally, the company is likely to emerge from its pre-coverage period and attract increased attention from investors, potentially further boosted by its strong year-to-date performance. Currently, Optima Health is the best-performing stock within our model portfolio.
Valuation update. (The valuation update and the long term thesis are exclusive for paid subscribers)