Centric Health keeps “Buy” rating at Echelon Wealth Partners

A new acquisition by Centric Health (Centric Health Stock Quote, Chart, News TSX:CHH) should add substantially to its client base, according to Echelon Wealth Partners analyst Douglas Loe, who reviewed Centric’s latest quarterly results in an update to clients on Friday.

Loe chose to stay bullish on the name, maintaining his “Buy” rating and $0.25 per share target, which at press time represented a projected return of 67 per cent.

Ontario-based pharmacy and healthcare services to seniors provider Centric announced its fourth quarter and year end results last Thursday, two days after announcing an agreement to acquire specialty pharmacy company Remedy Holdings, which operates 13 pharmacies in Ontario, Alberta and BC, for $44 million.

On the quarter, Centric’s revenue rose from $31.1 million for the previous quarter to $32.2 million, while EBITDA dropped slightly from $2.8 million to $2.5 million. Centric’s average number of beds served increased 6.0 per cent to 31,457.

“In the fourth quarter, much like the rest of the year, our financial results reflected the consistent and successful execution of our business plan,” said David Murphy, President and CEO, in a press release.

“We continued to grow our Specialty Pharmacy business by increasing the average number of residents serviced, which in turn contributed higher revenue and Adjusted EBITDA. After a transformative period for our company, we ended 2019 with significantly improved operating margins and a substantially deleveraged balance sheet, setting the stage for the next phase of our growth strategy,” Murphy added.

For Loe’s part, the analyst was expecting revenue and EBITDA of $31.0 million and $2.7 million, with an EBITDA margin of 8.7 per cent as opposed to the generated 7.7 per cent.

The analyst said margin softness came from increased corporate costs which he thinks will drop
to lower relative levels going forward.

Loe said Centric is still carrying financial costs from its convertible debt issued to two investors, totalling $39.5 million, but that the company’s stabilized pharmacy operations “should be able to sustain the debt burden while still generating free cash.”

On the Remedy deal —which will grow Centric’s client base within regions where it already has presence and help to consolidate a currently fragmented sector— Loe said there should be cost savings popping up once integration takes place.

“FQ419 financial data does not fundamentally alter our CHH investment thesis or our F2020-to-F2023 revenue/EBITDA forecasts that already incorporate impact from Remedy’sRx in FQ220 and beyond, and our expectations that modest organic bed count growth through new contract wins can transpire at regular intervals throughout our forecast period,” Loe wrote.

“We still believe that the substantial geographic overlap between the two firms will enable material cost reduction through integration of Rx dispensation centres and administrative activities in cities there that overlap exists, as it does in most major urban centres in ON-AB-BC as described before,” Loe said.

The analyst made minor adjustments to his forecast, now calling for fiscal 2020 total revenue of $171.5 million and adjusted EBITDA of $15.9 million and fiscal 2021 revenue of $198.3 million and adjusted EBITDA of $18.9 million.