Centric Health will survive, Beacon Securities says

The road may have been bumpy lately for Centric Health (Centric Health Stock Quote, Chart, News TSX:CHH) but investors are likely to see better days ahead, according to Beacon Securities analyst Doug Cooper, who reviewed Centric’s latest quarterly results in an update to clients on Tuesday.

Toronto-based Centric Health, which runs a national network of pharmacy fulfilment centres and provides specialty pharma services to residents of seniors communities, reported third quarter fiscal 2019 financials on Monday, coming in with revenue up 12.5 per cent year-over-year to $27.9 million, driven by an increase in average bed count of 31,281 compared to 29,040 a year earlier.

Adjusted EBITDA in the company’s specialty pharmacy segment grew 204.1 per cent to $4.0 million with EBITDA margin growing from 4.8 per cent to 12.9 per cent.

Over the quarter, Centric made a couple of moves to deleverage the business, by entering into a definitive agreement to sell its Surgical and Medical Centres division to Kensington Private Equity Fund for $35 million in cash (the sale is expected to close at the end of November, 2019) and through a private placement for gross proceeds of up to $37.7 million, announced on September 30.

“Our momentum continued in the third quarter, with strong growth in revenue and beds serviced, and significant growth in Adjusted EBITDA for our core Specialty Pharmacy business,” said David Murphy, President and CEO, in a press release. “The quarter was also an eventful and successful one as it relates to strengthening our balance sheet, as we announced both the sale of our Surgical and Medical Centres division and a large private placement. With these milestones and our strategic transformation substantially completed, we have significantly improved our ability to capitalize on organic growth and acquisition opportunities in the Canadian institutional pharmacy sector.”

Cooper says the company’s moves set Centric up for a break-out year in 2020.

“It has been a long road, but we believe CHH is entering fiscal 2020 on excellent footing,” writes Cooper. “Its historic margin profile in pharmacy has been restored, which should result in free cash flow generation; its balance sheet should enable the start of an accretive consolidation strategy and shareholders still have the free option on Ace Age/Karie, which is entering its own growth phase and is strategically important in attacking the very large ‘seniors at home’ market.”

The analyst says that the turnaround in Centric’s specialty pharma segment is now virtually complete, pointing to expanding margins in the sector and growing bed count.

“We anticipate continued organic growth as we head through FY20 where we are targeting period ended beds of ~35,000. With ~400,000 LTC beds in Canada, that would still only represent a market share of 8.5 per cent, implying significant growth opportunities still lie ahead,” Cooper writes.

Cooper says he hasn’t made material changes to his revenue and EBITDA forecasts for 2020, although he has incorporated the sale of Centric’s surgical assets and the private placement into his model. The analyst notes the dilutive effects of the added common shares (544 million), which affected his target price for Centric.

The analyst is calling for full fiscal 2019 revenue and adjusted EBITDA of $129.7 million and $9.1 million, respectively, and fiscal 2020 revenue and adjusted EBITDA of $142.7 million and $14.3 million, respectively.

With the client update, Cooper is retaining his “Buy” rating for CHH but dropping his target from $0.60 to $0.35 per share, representing a projected 12-month return of 112 per cent at the time of publication.