VitalHub price target trimmed at Beacon, keeps “Buy” rating

Near-term challenges will persist for VitalHub (VitalHub Stock Quote, Chart, News TSXV:VHI), says Beacon Securities analyst Gabriel Leung who thinks the company’s recurring revenue will help it through the rough patches.

Leung reported on VitalHub’s latest quarterly results in an update to clients Thursday where he maintained his “Buy” rating but dropped his 12-month target from $2.80 to $2.65 per share.

Toronto-based VitalHub, which develops and supports electronic healthcare record solutions for organizations within the acute care, mental health, community health and long-term care sectors, delivered its first quarter 2020 financials on Wednesday, showing revenue up 13 per cent year-over-year to $2.8 million. Adjusted EBITDA came in at $181,000 (not including a gain in foreign exchange) versus $657,000 a year earlier.

On COVID-19’s effects on the company’s business, VitalHub CEO Dan Matlow wrote in the press release, “We began to see the impact of COVID-19 in the middle of the quarter, with requests coming in from clients to extend the utility of some of our offerings toward assisting in the pandemic response, as well as a general slow-down of implementations and business, consistent with the market.”

“Overall, we expect to see a slow-down of activity over the next few quarters. The Company believes it will continue to be cash flow positive even with the reduced activity,” Matlow added.

For his part, Leung was calling for revenue and EBITDA of $2.83 million and $346,000, respectively. Looking deeper, the analyst pointed to recurring revenues which climbed to $1.8 million compared to $1.2 million a year earlier and perpetual license revenue was $590,000 compared to $143,000 a year earlier. Professional services declined to $384,000 compared to $1.1 million for last year’s Q1, a drop which Leung says was likely COVID-related.

“As it relates to the outlook, the company noted that it does expect to see a slowdown in activity over the next few quarters (likely on professional services), although it expects to remain cash flow positive during this period,” Leung wrote.

“That said, we believe the company still has relatively good earnings visibility thanks to its $7.43-million ARR, along with backlog of business, which includes larger contracts like the 5-year, $9-million contract with the Province of Nova Scotia’s Department of Community Services, which is currently in deployment,” Leung said.

The analyst said VitalHub’s M&A activity should keep developing, as the company has a large cash balance and a number of potential targets that would either help enhance its product portfolio, expand its footprint or add new customers.

“On the back of the Q1 results, we have maintained our Buy rating, but have lowered our target slightly to $2.65 (was $2.80), which is based on 4x FY21e EV/Sales. We believe there could be upside to our target once we get more definitive details around the company’s near-term acquisition pipeline,” Leung wrote.

Leung is now forecasting fiscal 2020 revenue and EBITDA of $10.5 million and $0.6 million, respectively. At press time, the analyst’s $2.65 target represented a projected return of 73 per cent.