Byron Capital’s Loe upgrades CML Healthcare to a BUY

Byron Capital healthcare and biotech analyst Douglas Loe says he is encouraged by the value CML Healthcare (CML Healthcare Stock Quote, Chart, News: TSX:CLC) is realizing for the sale of its imaging assets.

Last week, the company announced it had completed the first in a series of divestitures, entering into multiple sales agreements for imaging locations in Ontario and B.C. for gross proceeds of $44.8-million. The assets had generated $32.6-million in revenue in 2012.

CEO Thomas Wellner said the move will sharpen the company’s focus.

“The sale of our diagnostic imaging business represents a major milestone in CML’s transition to a pure play laboratory services provider. Throughout this process, we have maintained access for our clients, as well as the high-quality standards expected of us by our partners. I want to personally thank our dedicated staff for their continued professionalism and commitment to delivering high-quality care for our clients,” he said. “The valuation for this first series of our diagnostic imaging divestitures is in line with our expectations. We are well advanced in the divestment of the remaining clinics and licences, having received significant market interest, and will be making further announcements regarding the sale of the remaining Ontario diagnostic imaging locations in the coming weeks.”

Loe says he is encouraged by the sale price CML negotiated because he sees this healthcare services niche as one that has been compromised by funding compression, particularly in Ontario. He says the cash derived from these sales should reduce the company’s overall debt levels and therefore reduce the overall business risk to the company’s core lab services business.

In a research update to clients recently, Loe maintained his one-year target price of $8 on CML Healthcare, but upgraded the stock to a BUY from his previous HOLD.

Founded in 1970, Mississauga-based CML Healthcare is Canada’s largest community based medical imaging service provider in Canada. The company’s topline has been on a slide of late, from $518.5-million in 2009 to $363.9-million in 2012, as the company divested itself of some of its non-core businesses. Loe thinks fiscal 2013 will continue that trend, with revenue of just $258.7-million, but will begin to crawl back the following year, when he thinks the company revenue will climb slightly to $262.8-million.

At press time, shares of CML Healthcare were down 1.6% to $7.30.