Pethealth sale could mean big upside for shareholders, says Industrial Alliance

There’s no guarantee that Pethealth (TSX:PTZ) will be successful in selling itself, but there’s reason to believe that the potential sale price could be much higher than what its shares are currently going for, says Industrial Alliance Securities analyst Fred Westra.

On Tuesday, Pethealth confirmed that it is “reviewing strategic alternatives for the potential sale of the company”, commonly accepted street code for “available for the right price”.

Westra says there is “tremendous value” in Pethealth. In a research update to clients yesterday, the analyst broke down the value of the company in light of a potential sale and in consideration of the company’s recent Q2 results, which were reported on August 14th. Westra tackled the value of the company by examining the value of three units; its insurance business, its microchip and database operations, and its online adoption service.

The analyst compares Pethealth’s insurance business to peer Trupanion (NYSE:TRUP) and arrives at a value of between $60-$80million or $1.73-$2.27 per share. He compares its microchip and database business to U.K.-based Animalcare PLC (LON: ANCR) to assign a value of more than $35-million, or $1.00 per share. And he believes the company’s Petango brand and ecommerce business is worth about $20-million, or $0.57 a share based on transactions by Discovery Communications (NASDAQ:DISCA), by Nestle Purina, and by PetSmart (NASDAQ:PETM).

Westra’s sum-of-the-parts valuation has him arrive at a price of $3.34 for Pethealth, but he says he could see upside as a high as $4.00 per share. For the time being, the analyst continues to value the company based on the assumption that it will remain independent. He believes Pethealth will post adjusted EBITDA of $5.8-million on revenue of $52.2-million in fiscal 2014, numbers he thinks will rise to adjusted EBITDA of $8.1-million on revenue of $59-million the following year.

Westra yesterday maintained his STRONG BUY recommendation and 12-18 month target price of $2.50, implying a return of 37% at the time of publication.