Centric Health’s (Quote, Chart TSX:CHH) long-term care pharmacy operations are heading in the right direction, says Douglas Loe of Echelon Wealth Partners. In a research update to clients Tuesday, the analyst reiterated his “Buy” rating and $0.40 target price.
Centric has made a couple of announcements this past week, one being a 900-bed contract, which adds to the company’s 28,701-bed long-term care pharmacy network. The other announcement was of a partnership struck with leading cannabis company Canopy Growth Corp (Quote, Chart TSX:WEED, NYSE:CGC) that will see the latter act as preferred medical cannabis supplier to Centric’s continuing care patients.
Loe says the news hasn’t provoked him to revise his valuation assumptions but has added
positive bias, nonetheless.
“Taken together with new initiatives in medical cannabis dispensation and advisory/consultation services within Centric’s eldercare franchise, along with the opportunity to expand into home healthcare markets with its partnered pharmaceutical dispensing/packaging Karie device, Centric is showing us that it can creatively respond to dispensation fee and generic drug reimbursement compression it has endured in recent quarters (including in recent FQ218 financial data), and without incurring any new balance sheet risk in the process,” says Loe.
“We do anticipate that FQ318 financial data could be sequentially soft as it frequently is just on softening procedure volumes in the firm’s Surgical & Medical Centres division, and this expectation introduces some valuation headwinds into our near-term outlook.
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But looking beyond the current quarter, we just see too many positive elements to the firm’s business strategy to withhold positive regard on the stock. The new 900-bed contract should be accretive by FQ418/FQ119 and we see no reason why the new alliance with Canopy cannot be positive to the firm’s LTC Rx operations once legal impediments are eliminated,” he says.
Loe thinks CHH will generate revenue and adjusted EBITDA in 2018 of $176.2 million and $14.0 million, respectively, and revenue and adjusted EBITDA in 2019 of $192.0 million and $16.4 million, respectively.
His $0.40 price target is based on 10x. his EV/F2019 EBITDA forecast and represents a projected 12-month return of 21 per cent.