Long-term care pharmacy operator Centric Health (Centric Health Stock Quote, Chart, News TSX:CHH) just received a substantial target raise from Echelon Wealth Partners analyst Douglas Loe who said in a Wednesday update to clients that the company’s growth trajectory and cost-synergies will buoy the stock over the next 12 months.
Toronto-headquartered Centric Health operates a network of pharmacy fulfillment centres in over 850 seniors and other long-term care (LTC) communities with a combined population of over 50,000 residents with services in Ontario, Alberta and BC.
The company reported its first quarter 2020 results on Tuesday, showing revenue up 3.0 per cent year-over-year to $30.4 million and adjusted EBITDA up 10.2 per cent to $3.2 million. Those numbers were down from the previous quarter at $32.2 million in revenue and $4.0 million in EBITDA.
The quarter also saw Centric’s number of beds serviced climb 3.4 per cent year-over-year to 31,387, while subsequent to the quarter’s end the company announced the closing of major acquisition Remedy Holdings, which vaulted Centric (soon to be renamed CareRX) into the position of largest specialty pharmacy services provider in Canada.
In the quarterly commentary, president and CEO David Murphy said the COVID-19 pandemic has had “no material effect” on the company’s financial performance to date.
“Our pharmacy locations remain fully operational and we are taking all reasonable steps to mitigate against any expected risks this pandemic may pose to our employees, customers and to our business,” Murphy said.
For his part, Loe called the quarterly results solid but modest, as the company generated positive EBITDA and margin during a seasonally soft quarter for LTC pharma. Loe said he expects the integration of Remedy’s business to result in operational and administrative cost synergies. At the same time, the analyst said he’s encouraged by the company’s moves to keep its debt under control, with the current debt at the end of the Q1 of $58.6 million.
“While we are mindful that FQ120 EBITDA/margin data was below recent trend lines, the quarter itself does in our view misrepresent how Centric’s operational health will materialize in future periods,” Loe wrote.
“Though Remedy’s Rx has clearly impacted Centric’s balance sheet in substantial ways, it has not yet been reflected into income statement data as positively as we expect it to in FH220 and thereafter. That is before easily-attainable administrative/operational cost synergies are achieved throughout Centric’s Rx network, at least in geographies where Centric (either Classic Care operations in ON, or Pharmacare operations in AB, or CareRx operations in BC) and Remedy’sRx have overlapping jurisdictions,” Loe said.
With the client update, Loe maintained his “Buy” rating but upped his price target from $0.25 to $0.35, which came from ascribing an 11x multiple to his 2021 EBITDA forecast. At press time, Loe’s target represented a projected return of 35 per cent.
“We believe this multiple is justified based on pending revenue/EBITDA growth trajectory and cost synergies that we expect to be apparent during the one-year time horizon to which our PT applies, and possibly before end-of-F2020,” Loe wrote.
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