A softer than expected quarter and changes to fee structures have Canaccord Genuity analyst Neil Maruoka lowering his price target on Centric Health (TSX:CHH), though the analyst still thinks the stock is a buy.
Yesterday, Centric Health reported its Q4 and fiscal 2017 results. In the fourth quarter, the company posted Adjusted EBITDA of $4.1-million on revenue of $42.3-million, a topline that was up 1.2 per cent over the same period last year.
“In 2017, we completed what was a three-year transformation, which included selling off non-core businesses, making strategic acquisitions and strengthening the balance sheet,” CEO Dr. Jack Shevel said. “Moving into 2018, we are positioned as a leading provider of specialty pharmacy services and surgery and medical services with the resources to further consolidate and grow our position. In 2018, we will also look for opportunities to build on our position as a key provider to seniors to achieve solid growth,” added Dr. Shevel. “This includes the launch of Karie, expected in the second half of the year, which will be a disruptor of traditional drug delivery for seniors at home, and also medical marijuana, which has many applications in seniors care.”
Maruoka notes the quarter fell below his expectations, but says that’s not what worries him.
“More alarmingly, the company announced proposed changes to federal generic drug pricing and dispensing fees in Alberta that could generate additional headwinds to growth in the near term,” the analyst says. “Although this is not the first time Centric’s growth has been threatened by fee structure changes, it nonetheless illustrates the challenges of working with governmental payors. However, while these fee changes will likely be partially offset by targeted cost reductions of $4 million annually and growth as the company executes its capital-light growth strategy, we see increasing operational risk and we are thus increasing our assumed WACC to 11.0% (from 9.7%).”
In a research update to clients today, Maruoka maintained his “Buy” rating on Centric Health, but lowered his one-year price target on the stock from $1.10 to $0.90, implying a return of 140 per cent at the time of publication.
Maruoka thinks Centric health generate EBITDA of $22.5-million on revenue of $196.1-million in fiscal 2018. He expects those numbers will improve to EBITDA of $27.3-million on a topline of $217.4-million the following year.