Take a pass on CRH Medical, Beacon Securities says

Despite posting better than expected numbers for Q4, CRH Medical (CRH Medical Stock Quote, Chart, News: TSX:CRH) is expected to generate lower revenue per case in 2018, says analyst Doug Cooper with Beacon Securities, who maintains his “Hold” recommendation and a target price upgrade to US$2.75.

On Monday, healthcare products company CRH released its financial results for the fourth quarter and fiscal year ended December 31, 2017, with Q4 coming in with a revenue of $32 million (all figures in US dollars) and EBITDA attributable to shareholders of $11.5 million.

“Our fourth quarter results were positively impacted by the integration of the acquisitions we completed during the third quarter and a higher percentage of commercially insured patient cases,” said Edward Wright, CEO, in a press release. “Looking forward to 2018, we believe that the impact of the CMS coding changes that went into effect January 1, 2018, and changes in commercial payor rates will be offset by organic growth in patient cases, as well as the successful execution of our acquisition strategy, which we expect to be similar to 2016 and 2017.”

Yet, in a note to clients on Tuesday, Cooper points to a number of negatives from the quarter, such as average revenue per case which was $450, down from $511 last year, as well as negative year-on- year growth in anesthesia revenue.

Moreover, the analyst says there are issue relating to the fiscal year ahead, where case load, pricing cuts and negative operating leverage are warranting a more cautious outlook.

“Healthcare service companies typically trade in the range of 8-12x EBITDA. Based on our forecast noted above and the recent price of $3.05 the stock trades at 10.5x,” says the analyst. “Given the headwinds that will likely start to appear in the financials in Q1, we believe this is a fair multiple.”

“Given slightly upwardly revised FY18 EBITDA forecast and a slightly higher EBITDA multiple target, we are raising our target to $2.75 (was $1.70),” says the analyst, who maintains his “Hold” recommendation, with the revised target representing a negative ten per cent return at the time of publication.