Small cap billing platform Constellation Healthcare Technologies looks set to light up markets up on its AIM debut on Monday (8 Dec).

The prospectus is not yet available on the business, which is joining the market via a private placement-style initial public offering (IPO) but our back of the envelope calculations indicate the stock is worth keeping an eye on.

Chief executive Paul Parmar tells us the business is on course to make around $52 million (£33 million) in sales this year and has a proven track record of delivering profitability and acquisitions.

On Parmar’s numbers, Constellation is a top 20 player in a fragmented US market for health care billing solutions estimated to be worth $37 billion in outsourcing sales. Constellation provides bill payment outsourcing for doctor’s surgeries in the United States. Healthcare is generally not free at the point of use in the country, the same as it is in the UK, meaning physicians need to submit invoices to health insurance companies or relevant government authorities to get paid.

This process is becoming increasingly complicated as ‘payers’ – health insurers or governments – try to implement automated payment systems to cut costs. As a result, invoicing must be standardised to the payers’ systems in order to be read, processed and paid. Organisations like Constellation and others have stepped in to provide their own technology platform so billers – primarily physicians – can outsource their billing processes, saving them time and money.

Small caps - Constellation (athena)

Looking at relative valuations, Constellation’s listed peer, Athena Healthcare (ATHN:NDQ), trades at 7.5 times trailing 12-month sales. In its IPO, Constellation is raising £9.6 million, giving new investors around 12.8% of the enlarged business, which values the business at around £75 million, or 2.3 time sales.

Athena, it is important to note, is the market leader with annual revenues of almost $600 million, so it is likely to command a significant premium over the rest of the market and better profit margins. Constellation is in a pack of 14 or so competitors with revenue greater than £45 million. The rest of the market is even more fragmented, which Parmar sees as an opportunity.

He wants to use Constellation as a vehicle to hoover up smaller businesses, in a buy-and-build approach to gaining market share. This will mean shareholders will get tapped up for funds further down the line, with a target of as much as $200 to $300 million earmarked for acquisitions. This is a key issue for investors who will need to cough up more cash to avoid dilution. Another risk is that Athena is now already so far ahead in terms of market share that its competitors will be left fighting over scraps.

Issue Date: 04 Dec 2014