Centric Health is still a buy, Echelon Wealth says

Centric Health (Centric Health Stock Quote, Chart, News: TSX:CHH) may have produced softer Q1 earnings than expected but margin strength in its specialty surgery operations combined with still-to-come improvements in the company’s cost base mean that analyst Douglas Loe of Echelon Wealth Partners still has faith in CHH.

On Wednesday, Loe reiterated his “Buy” recommendation and $0.65 price target, representing a projected one-year return of 155 per cent at the time of publication.

Yesterday, Healthcare service provider Centric Health announced its first quarter ended March 31, 2018, financials, with the company highlighting a two per cent increase in revenue from continuing operations.

“As we completed the transition of beds under a large national contract with an interim management structure, and began to execute on the business re-engineering plan, the results in the first quarter of 2018 were slightly below the Company’s expectations. While we face headwinds as a result of previously disclosed changes in government regulations, we are confident that we can mitigate the impact by improving efficiency and reducing costs in our new national Specialty Pharmacy structure,” said Jack Shevel, Chairman, in a press release. “Despite the potential impact of these changes, we expect to deliver year-over-year Adjusted EBITDA growth in 2018.”

Loe says the company’s $44.5 million in revenue from continuing operations actually beat his own forecast of $43.6 million, while its Adj. EBITDA of $3.8 million came under his $4.2 million and represented a decline of 14 per cent.

“As in prior quarters dating back to the physio/rehab/insurance assessment divestiture to Audax back in 2015, the firm continues to focus on two eldercare operations, one in long-term care pharmacy and the other in specialty surgery, with the former underperforming recent self- defined standards while the latter outperforming same,” the analyst says.

“We are disappointed though not overly surprised that FQ118 financial data were sequentially soft in comparison to FQ417 data that was itself soft at the time, but we see improvements to cost base as a sensible short-term hedge against pharmacy funding compression before more aggressively augmenting pharmacy operations through acquiring smaller pharmacy vendors that are themselves subjected to the same funding pressures that Centric is, and perhaps with less strategic flexibility than Centric has with diversification into specialty surgery augmenting free cash flow,” he says.

Loe continues to value CHH based on 10x EV/EBITDA as applied to his F2019 EBITDA of $21.1 million, which was slightly revised from the previous $21.4 million.

The analyst also notes that the company’s quarterly EBITDA could receive a boost from service revenue connected to its Karie handheld devices, which could add up to $1.5 to $2.0 million on their own by the end of 2021.