Echelon Wealth Partners analyst Douglas Loe has upped his rating to a “Buy” on specialty pharmacy provider Centric Health (Centric Health Stock Quote, Chart, News TSX:CHH), saying in a Tuesday report to clients that recent price compression along with the company’s growth trajectory are cause for renewed optimism on the stock.
Centric, which provides pharmacy and other healthcare services to Canadian seniors, serving more than 31,000 residents in over 460 seniors communities, on Tuesday announced a definitive agreement to acquire Remedy Holdings and its Remedy’sRx Specialty Pharmacy business, which operates 13 pharmacies across Ontario, Alberta and BC.
The deal valued Remedy at $44 million.
Centric president and CEO David Murphy called the acquisition the culmination of Centric’s transformation over the past two years.
“The combined business will be well positioned to accelerate growth and lead the consolidation of a fragmented industry. In addition to strengthening our existing national platform, this transaction will create opportunities to realize material synergies and generate substantial shareholder value as we integrate the businesses,” Murphy wrote in a press release.
Loe said he likes the deal, which at $44 million works out to about 1.4x TTM of Remedy’s revenue of $60 and about 8.2x TTM EBITDA. Loe said, “Remedy’sRx substantially augments Centric’s client base and in geographies where it already has a strong footprint through prior acquisitions.”
The analyst also said there are likely synergies between Centric and Remedy’sRx through consolidation of dispensation centres and through minimizing administrative and corporate cost overlaps (Centric’s corporate costs for its most recent quarter were $1.2 million).
“We remain positive about Centric’s recent focus on building out its long-term care Rx operations, a decision that seems prudent based on the historically strong EBITDA margins that this business has generated and on recent margin recovery that transpired sequentially throughout fiscal 2019,” Loe said.
The analyst said he is not too concerned about the share dilution that will come with the Remedy acquisition, saying, “We are positive about Centric’s ongoing activities in building out its LTC Rx operations through organic and acquisitive growth, and we are simultaneously pleased that the just-announced acquisition of Remedy’sRx provides the firm with substantive bed count growth in geographies where it already had client bandwidth, and thus in geographies where it can achieve supplemental cost synergies through administrative and dispensation center consolidation. The transaction is certainly dilutive to the firm’s shares outstanding, but this is a preferred recapitalization mechanism, at least for us, for a firm that has a long track record of being more distracted by debt reduction than by growing its healthcare services operations,” Loe wrote.
Looking ahead, Loe has called for fiscal 2020 revenue and adjusted EBITDA of $170.6 million and $15.9 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $197.6 million and $18.9 million, respectively.
With the update, Loe has changed his rating from “Hold” to “Buy” and raised his price target from $0.20 per share to $0.25 per share, which at press time represented a projected one-year return of 108.3 per cent.
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