At $0.40 per share, specialty pharma and surgery company Centric Health Corp. (TSX:CHH) is an outright bargain, says Beacon Securities analyst Doug Cooper, who on Monday reiterated his “Buy” recommendation and one-year target price of $1.25.
Last week, Centric released its fourth quarter and year-end financials, posting a marginal revenue increase along with a seven per cent decline in adjusted EBITDA for Q4. Over 2017, the company made acquisitions and completed a round of debt refinancing, all part of a strategic turnaround, says Chairman and Interim CEO Jack Shevel.
“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,” says Shevel in a press release. “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.”
Last May, shares of CHH hit a high of $0.90 but have trailed off since, currently residing in the $0.40 range. In comparison to its peer group, that makes Centric a great buy, says Cooper, who says the stock isn’t receiving its due respect.
“In our view, some stocks receive the ‘benefit of the doubt’ valuation (resulting in higher valuation multiples) while others do not. Clearly, when Centric was trading at $0.90, it was receiving the former, while now, it is receiving the latter,” says the analyst in an update to clients.
“There is no question that some of the news that has removed this ‘benefit of the doubt’ has been self-inflicted (notably the poorly orchestrated CEO change and the longer than expected roll-out of the Chartwell contract) while others were out of its control (ie. generic drug price declines mandated by the provinces),” he says.
Cooper notes that Q4 results arrived in-line with expectations, and the company has two major growth initiatives on the horizon: a home dispensing unit called Karie and a cannabis distribution segment, both of which were not included in its current FY18 forecast.
“At $0.40, the stock trades at 8x our revised FY18 forecast of its core business. Other healthcare service companies such as Savaria Corp (SIS -T, NR) trade upwards of 15x. We note that this core business continues to have its own growth initiatives such as Quebec and other RFP’s, while surgical upside is driven by increased utilization and 2-tier healthcare system optionality,” says the analyst. “While buying the shares at current prices, one gets not only the base business, but also its two growth initiatives (Karie, Cannabis) for free.”
The analyst projects revenue and adj. EBITDA for FY18 at $184.2 million and $20.1 million, respectively. His $1.25 target for CHH represents a potential return of 213 per cent as of publication date.