Well Health gets a price target raise from GMP Securities

Aggressive M&A by Well Health Technologies (Well Health Technologies Stock Quote, Chart, News TSXV:WELL) is supporting shareholder value creation, according to GMP Securities analyst Justin Keywood, who reviewed the company’s latest acquisition in an update to clients on Friday.

With the update, Keywood kept his “Buy” rating but nudged up his price target from $2.25 to $2.35, which at press time represented a projected 12-month return of 65.6 per cent.

Health clinic and Electronic Medical Records (EMR) company Well Health announced last Thursday an agreement to acquire OSCAR EMR provider Trinity Heathcare, the number two OSCAR EMR provider in Ontario, after having acquired number one OSCAR EMR provider KAI in July. The $7.2-million purchase will consist of $3.7 million in cash, $1.5 million in shares and a $1.1-million earn-out over two years.

“THT is our fifth planned acquisition in Canada’s OSCAR EMR marketplace and further solidifies our position as the third largest EMR service provider in Canada supporting over 8,000 healthcare practitioners and their operations,” said Hamed Shahbazi, Chariman and CEO of Well Health, in a press release.

Keywood says the acquisition implies a 3x sales multiple, which is consistent with WELL’s past EMR purchases and should be accretive. Trinity generates around $2 million in sales annually, most of which is recurring and with double-digit EBITDA margins.

The acquisition should increase Well Health’s EMR revenue by about 40 per cent and raise its EMR market share in Canada to 15 per cent of the total market, says Keywood.

“We see several strategic advantages by acquiring both the #1 and #2 OSCAR EMR providers in Ontario with synergy implications. WELL could now look to acquire the remaining half a dozen OSCAR EMR providers that make up about another 5 per cent of the total EMR market, further bolstering its position as the #3 leader, only behind Loblaw and Telus Health,” said Keywood.

“We see the acquisition as consistent with our view of WELL expanding aggressively through M&A but being disciplined and making valuable purchases. The pace of transactions also supports a higher trading multiple, along with continued solid growth ahead,” the analyst wrote.

On valuing WELL, the analyst is looking to other successful serial acquirers and unique business models in fragmented industries, arriving at a 6x sales valuation.

“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, Descartes and Constellation Software 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,” writes Keywood.

With Well Health expected to triple its business this year and with high growth continuing in 2020 and beyond, there is a de-risked potential for a reset in valuation on results to a certain extent along with a potential for multiple expansion on rapidly recurring revenue growth.

Looking ahead, Keywood thinks that WELL should generate fiscal 2019 revenue and EBITDA of $31.7 million and negative $1.9 million, respectively, and fiscal 2020 revenue and EBITDA of $43.3 million and $2.4 million, respectively.

Disclosure: Cantech’s Nick Waddell and Jayson MacLean own shares of WELL Health and the company is an annual sponsor of Cantech Letter