WELL Health compared to Constellation Software and Descartes by Stifel

For investors looking to take part in the fast-developing ecosystem of virtual healthcare and telemedicine, Stifel GMP analyst Justin Keywood recommends WELL Health Techologies (WELL Health Techologies Stock Quote, Chart, News TSX:WELL).

Keywood increased his target price in an update to clients on Monday, saying WELL represents a high-growth name with a unique business model for tech incubation in the healthcare space.

Vancouver-based WELL Heath, which has an Electronic Medical Records (EMR) business, owns and operates 21 medical clinics and has a telehealth service, announced last Friday the completion of a bought deal public offering of 6,534,300 shares for gross proceeds of about $14.4 million.

Management said the new money will go towards further M&A activity and general working capital purposes including cash for operations and interest payments.

“We are pleased to have completed this offering and obtained the resources that will allow us to continue our digital health focused and disciplined capital allocation program,” said Hamed Shahbazi, Chairman and CEO, in a press release.

WELL Health has seen its share price rise dramatically in the past year, but Keywood sees more upside over the next 12 months. Calling WELL a good serial consolidator, the analyst said WELL now warrants a 9x sales multiple, saying, “[Recent] changes in telehealth billing codes have essentially created a new industry but also make the roll-up strategy of virtual care more valuable.”

For comparison’s sake, Keywood pointed to prime examples in the tech sector such as Enghouse, Descartes and Constellation Software as names that historically trade at higher multiples averaging 6x-7x sales with a high end range of 9x-10x sales.

“Although these companies are much larger than WELL, we believe a similar valuation case can be made for the early-stage growth profile and opportunity ahead. WELL tripled its business in 2019 with high growth continuing in 2020 and beyond. This de-risks the potential for a reset in valuation on results to a certain extent but also highlights multiple expansion on the rapid recurring revenue growth,” Keywood wrote.

The analyst said his investment thesis for WELL rests on five elements: added scale from the fact that WELL aims to acquire or build several more clinics (Keywood forecasts about 25 by fiscal 2021); more M&A from the company which acquired seven EMR assets over the past year along with strategic investments in telehealth; the company’s 600,000 patient visits pre year at its clinics, which provide a unique testing ground for the company’s tech; accelerated organic growth potential for its technologies across Canada and the US; and a management team with a track record of proven value creation.

Keywood also sees a potential take-out with WELL, saying, “Although early days, we see WELL as setting up for a possible exit of part or all of its operations in a longer-term scenario. WELL’s clinic assets could be attractive to private equity with an EMR customer base suitable for Telus Health or Loblaw. The strategic nature of these assets could imply a higher multiple,” Keywood wrote.

The analyst thinks WELL should generate fiscal 2020 revenue and EBITDA of $42.7 million and negative $0.6 million, respectively, and fiscal 2021 revenue and EBITDA of $52.4 million and $4.8 million, respectively.

With the update, Keywood has reaffirmed his “Buy” rating with the new target of $3.50 per share (previously $2.60), which at press time represented a projected 12-month return of 29.2 per cent.

Disclosure: Jayson MacLean and Nick Waddell own shares in WELL and the company is an annual sponsor of Cantech Letter.