Its stock has soared in 2019, but GMP Securities analyst Justin Keywood thinks there is still plenty of upside in WELL Health Technologies (WELL Health Technologies Stock Quote, Chart TSXV:WELL).
In a research update to clients today, Keywood maintained his “Buy” rating, but raised his one-year price target on the stock from $1.15 to $2.25, implying a return of 39.6 per cent at the time of publication.
Keywood says a vital component of WELL’s value proposition -M&A- was not included in his previous model, which has changed as of today’s report.
“WELL is up ~140% in the past three months and 260% YTD with a current market cap of ~$180mm but there is still substantial opportunity for price appreciation in our view,” the analyst writes. “WELL has made seven transactions since 2018 to create a unique business model of 19 family doctor clinics with a ~6%-10% EMR market share in Canada, along with other strategic investments. We believe that WELL will continue to be aggressively growth focused in expanding its health-tech platform with a solid management team and track record to support this pursuit. As a result, we reexamine how we value the business as material M&A was not included in our prior target price. For this analysis, we look at other successful acquirers and unique business models in fragmented industries for what is an appropriate trading multiple. We conclude that 6x sales is reasonable for WELL with the growth profile ahead (~100% two year CAGR), which equates to our $2.25 target price.”
Keywood says WELL brings to mind some of the great growth-through-acquisition stories on the TSX in the past decade, including Constellation Software, Descartes Systems Group and Enghouse.
The GMP analyst compares WELL Health Technologies to Descartes and Enghouse…
“We see WELL as consolidating a valuable fragmented industry in healthcare and technology with good management and track record to support this pursuit. Good serial consolidators, such as Enghouse (ESL), Descartes (DSG) and Constellation Software (CSU) trade at higher multiples at an average of 6x sales. Although, these companies are much larger than WELL, we believe a similar valuation case can be made for the early stage growth profile and opportunity ahead. WELL is expected to triple its business this year with high growth continuing in 2020 and beyond. This de-risks the potential for a reset in valuation on results to a certain extent but also highlights multiple expansion on the rapid recurring revenue growth. We also see some relevance in comparing WELL to Avigilon in its early stages, which averaged 6x sales and reached up to 9x. Avigilon had aligned management, a unique business model in a fragmented industry and high growth. Overall, we see a 6x sales multiple as appropriate for WELL.”
Keywood thinks WELL will post EBITDA of negative $1.9-million on revenue of $31.0-million in fiscal 2019. He expects those numbers will improve to EBITDA of positive $1.1-million on a topline of $42.0-million the following fiscal year.
The GMP analyst says he likes WELL Health Technologies because of its high growth, its recurring revenue model, what he sees as a unique model for technology incubation, a solid and aligned management team, and its potential to be taken out by the likes of a Telus Health or Loblaw.
Disclaimer: Nick Waddell and Jayson MacLean of Cantech Letter owns shares of WELL Health, and the company is an annual sponsor of the site.