Centric Health has “substantial upside”, Canaccord Genuity says

The company’s recent quarter revealed headwinds that may continue for longer than he initially expected, but Canaccord Genuity analyst Neil Maruoka thinks Centric Health (TSX:CHH) is undervalued.

On Tuesday, Centric Health reported its Q3, 2017 results. The company earned $248,000 on revenue of $40.25-million, a topline that was down four per cent from the same period last year.

“In the third quarter, we continued to focus on bringing on board the new beds under the national long-term-care pharmacy contract awarded at the end of last year. We are making steady progress while maintaining a careful patient-centric approach. This will be substantially complete by the end of 2017,” said CEO David Cutler. “In addition, we continued to execute our growth strategy by forging an agreement that will enable us to serve the needs of seniors at home and others faced with managing multiple medications. Karie is an innovative device that will improve drug safety and provide peace of mind to caregivers. We are also very pleased with the continued growth in surgical volume experienced in our surgical and medical centres. With a 5-per-cent growth in revenue and an increase in adjusted EBITDA margin to 13.6 per cent from 10.3 per cent the previous year, we are continuing to see the benefits of the increased utilization at our facilities throughout the year.”

Maruoka says some problems he expected to be short term in nature are dragging out, but says there is a lot to like about the company, longer term. In a research update to clients today, the analyst maintained his “Buy” rating on Centric Health, but lowered his one-year price target on the stock from $1.20 to $1.10, implying a return of 66.7 per cent at the time of publication.

“Centric Health reported Q3 results that were below our forecasts, reflecting transient but increasing reimbursement headwinds in Ontario and the lingering effects of technical issues that have slowed the onboarding of new contracts,” the analyst explains. “While we had felt that the challenges associated with adding new beds was likely confined to Q2 and Q3 of this year, we now expect that the impact will be felt into 2018. Further, a temporary change to Ontario’s pharmacy reimbursement is expected to generate a ~$0.7 million drag on EBITDA next year. While this could be partially offset by the tuck-in acquisition of Salus Pharmacare, we nonetheless believe our concerns around revenue growth are supported by recent amendments to the covenants on Centric’s credit facility, which were needed to provide breathing room into the first half of 2018. Due to growing headwinds, we have tempered our forecasts for the next three years. Following these changes, we are lowering our target price to C$1.10 (from C$1.20). However, despite near-term concerns, we believe there remains substantial upside for the stock as investors begin to see the torque from Centric’s capital-light growth strategy.”

Maruoka thinks Centric Health will generate EBITDA of $18.4-million on revenue of $172.7-million in fiscal 2017. He expects those numbers will improve to EBITDA of $24.6-million on a topline of $207.4-million the following year.