CareRx is still undervalued, Echelon Capital says

Echelon Capital Markets analyst Douglas Loe is sticking to his investment thesis on CareRx (CareRx Stock Quote, Chart, News TSX:CRRX) after the long-term care pharmacy company released its latest quarterly numbers.

In an update to clients last Friday, Loe reiterated his “Buy” recommendation and $7.00 target price, saying acquisitions recently made by the company should be paying off in the near future.

CareRx, a healthcare services provider who recently put its focus exclusively on long-term care pharmacy services, with business currently in Alberta, Ontario and BC, announced on August 13 its second quarter 2020 results, showing revenue from continuing operations up 26.2 per cent year-over-year to $39.7 million.

The news for the quarter included the company’s closing on the acquisition of RemedyRx’s specialty pharmacy business, which has set CareRx on its current path. Last year, CareRx (formerly Centric Health) divested its retail pharma business in Alberta along with its surgical and medical centres segment. At the start of 2020, the company also sold off its performance orthotics business.

“We had a strong and eventful second quarter,” said David Murphy, President and CEO of CareRx, in a press release. “Our acquisition of Remedy's part way through the quarter makes us the country's leading provider of specialty pharmacy services to seniors in long-term care and retirement homes – contributing significant growth in revenue, profitability, and beds under contract. In addition, we completed our rebranding from Centric Health to CareRx Corporation, and further strengthened our balance sheet in
order to pursue further acquisition and growth opportunities.”

On the quarter that was, Loe said the headline data was close to his forecast, with revenue, EBITDA and margin coming in at $39.8 million, $2.8 million and 7.1 per cent, respectively. Loe had been calling for revenue of $40.9 million, with the analyst saying that he overestimated the contribution from RemedyRx’s business, which came in at $9.5 million for the Q2.

Loe said investors should expect sequential improvements in CareRx’s top and bottom lines as the Remedy integration advances over the second half of 2020.

“Our bias would be to consider FQ220 to be a transitional quarter anyway, even without transformative acquisitive growth transpiring in the period, and so our core investment thesis on CRRX is fundamentally unchanged,” Loe wrote.

“Our model overtly assumes that the firm can grow EBITDA through integrating fulfillment centres and administrative infrastructure in geographies shared by CareRx and Remedy’sRx pre-acquisition. Our model also tacitly assumes that new scale that the acquisition confers will allow CareRx to enhance exploration activities for new bed count through acquisition,” Loe said.

The analyst wrote that the long-term care pharmacy industry is still highly fragmented in Canada, with 77,000 nursing home beds in Ontario alone, which is not considering new facilities to be constructed over the next five years under newly announced government funding initiatives.

“CareRx’s balance sheet still incorporates measurable debt, but with a sizable proportion used to acquire Remedy’sRx that we expect to generate sufficient EBITDA augmentation to justify the transaction,” Loe wrote.

The analyst is calling for revenue to go from $168.2 million in 2020 to $195.7 million in 2021, while on adjusted EBITDA he is forecasting $14.2 million in 2020 and $18.6 million in 2021. Loe’s $7.00 target represented at press time a projected 12-month return of 40 per cent.