“Disappointing” Centric Health is still a buy, says Echelon Wealth Partners

Analyst Doug Loe of Echelon Wealth Partners is more cautious about Centric Health (TSX:CHH) after its second quarter financials, announced on Tuesday, came in soft on EBITDA margin, but he has nonetheless reiterated his “Buy” rating with a lowered price target of $0.40 (previously $0.65).

Healthcare services company Centric Health’s Q2 financials featured revenue of $43.3 million, up from $42.7 million a year ago and adjusted EBITDA of $3.4 million, down from $4.9 million a year ago.

That produced an Adj. EBITDA margin of 7.8 per cent, a falloff from last year’s Q2 of 11.5 per cent and an underwhelming performance during what has been conventionally a seasonally strong financial period for the specialty surgery and pharmacy centre company, says Loe.

“Disappointingly, Centric guided us to assume that trough EBITDA levels are expected next quarter rather than already in the rear-view mirror in FQ218 and we have revised our model accordingly,” Loe said in a Wednesday note to clients. “We thus assume that margin pressure within LTC Pharmacy operations could sequentially decline even further in FQ318, a trend that Centric will need to reverse with cost containment and new client wins.”

“The firm indicated in its conference call commentary that current LTC Pharmacy revenue is derived from about 28,700 beds already on-boarded, with another 1,400 from legacy contracts (presumably in part from the not-so-new-anymore 10,000-bed contract with Chartwell Retirement Residences that offset the loss of a similarly-sized contract with Revera last year,” he says.

The analyst now sees Centric Health generating Adj. EBITDA and revenue in 2018 of $14.0 million and $176.2 million, respectively, and Adj. EBITDA and revenue in 2019 of $16.4 million and $192.0 million, respectively.

“We are maintaining our Buy rating on CHH based on our expectations that the firm can solidify its market leadership in long-term care pharmacy operations while remaining laser-focused on cost containment and organically adding new bed count through new contract wins in this division as two ways to offset funding pressures described above,” says Loe. “But we are revising downward our one-year PT to $0.40 (previously $0.65) based on downward revision in our F2018-F2021 revenue/EBITDA projections.”

Loe’s $0.40 target represents a projected 12-month return of 57 per cent at the time of publication.