CRH Medical has price target cut at Beacon Securities

CRH Medical Corporation (CRH Medical Corporation Stock Quote, Chart, News TSX:CRH) hung onto its “Buy” rating from Beacon Securities analyst Doug Cooper after disappointing fourth quarter results.

The analyst reviewed the Q4 in an update to clients on Thursday and reduced his target by half.

Vancouver-based CRH is a gastroenterology-focused company which has commercialized its CRH O-Regan System for hemorrhoid treatment and in 2014 entered the anesthesia market through an acquisition. The company reported fourth quarter and full-year 2019 results on Wednesday, showing 2019 revenue up 6.8 per cent to $120.4million, with anesthesia services at $110.3 million and anesthesia patient cases up 24.8
per cent to 345,393. (All figures in US dollars except where noted otherwise.)

“As per our previously disclosed contracting strategy, we continued to work toward transitioning our business toward being more fully contracted with major payors,” said Tushar Ramani, CEO, in a press release. “The reason for this strategic move is perfectly illustrated in the fourth quarter as we experienced rate variability within our non- contracted procedure volumes, resulting in a decline in revenue per case. We expect that
our plan, coupled with our expectation for finalized billing legislation later this year, to mute, and hopefully eliminate, this variability as we advance through 2020. Moreover, we remain excited by our expanding business development pipeline, as we are increasing the ways in which we can broaden our anesthesia footprint.”

Fourth quarter results were EBITDA of $12.3 million on a top line of $30.4 million, which were well below expectations, according to Cooper, who pointed out that EBITDA actually contracted not only on a year-over-year basis but also sequentially during what is typically the strongest quarter of the year for CRH.

“We had taken a bullish view heading into the quarter primarily driven by an expectation that rev/case would uptick and that its acquisition program would accelerate in FY20 versus its historical run-rate driven by a larger BD team and significant liquidity through its JP Morgan led credit facility. Both of those expectations have now been pushed out to the end of the year,” wrote Cooper.

Revenue per case dropped for the ninth consecutive quarter to $292 from $355 a year earlier and from $315 in Q3 2019, with Cooper intoning that while management has put the blame of the shortfall on larger than expected declines in non-contract pricing (and hence the company’s move towards more contract pricing), the company’s shift will take a few more quarters to settle out, says Cooper.

“We are disappointed in the Q4 results as well as the near-term outlook. We are lowering our target multiple to 8x (from 11x) on our lowered sh. EBITDA forecast. As such, our target price drops to $3.25 (C$4.50) from $6.50 (C$8.75). While we maintain our Buy recommendation, we believe the stock will likely trade down to flat in the short-term until investors see (at least) a stability in rev/case,” Cooper wrote.

The analyst has adjusted his forecast, now calling for fiscal 2020 revenue and EBITDA of $121.6 million and $36.7 million, respectively (previously $129 million and $44.1 million, respectively). Cooper’s $3.25 target represented at press time a projected return of 75 per cent.