Stifel GMP analyst Justin Keywood likes the look of the new deal from WELL Health Technologies (WELL Health Technologies Stock Quote, Chart, News TSX:WELL), which just entered the US telemedicine market through a strategic investment in telehealth provider Circle Medical.
In an equity research update to clients on Wednesday, Keywood kept his “Buy” rating for WELL but lifted his target price from $5.35 to $7.00, saying the Circle Medical transaction is further proof of
WELL’s M&A prowess.
Vancouver-based WELL Health, which owns and operates primary healthcare clinics in Canada, has the country’s third-largest Electronic Medical Records (EMR) business and operates a national telehealth platform, announced on Tuesday a US$14-million investment in San Francisco-based Circle Medical, including a US$5-million cash component and a stock swap equivalent to US$9 million for WELL’s shares. (All figures in Canadian dollars except where noted otherwise.)
Once the transaction is completed, WELL will have majority ownership at between 56 and 60 per cent along with a call option to acquire the remaining shares. At the same time, WELL announced a $23-million private placement led by billionaire investor (and already an investor in WELL) Mr. Li Ka-Shing in part to finance the Circle Medical deal.
“Circle Medical is a graduate of the Y-Combinator(2) program and a true pioneer in providing a tech forward primary healthcare experience for patients and doctors, bringing the doctor’s office to a patient’s home or work. Circle Medical has previously delivered telehealth services in 35 states in the last several months of its operations and the company is working on quickly ramping up and covering additional US states,” said WELL Health in a press release.
For his part, Keywood said the deal implies an approximately 5x sales purchase multiple, which the analyst says is well below US peers that average 15x sales and certain Canadian peers.
Keywood said the transaction is continued validation of WELL’s ability to source good transactions in a disciplined and value-creating way and that it “significantly expands WELL's market share and profit opportunity.”
“In particular, we find the per unit economics for U.S. telehealth at +$150/visit versus Canada at $35/visit as illustrating the opportunity for meaningful growth in sales and earnings ahead. Combined, we see Circle Medical as a solid transaction, which could have meaningful synergies beyond our initial analysis. We also believe that WELL can repeat acquiring strong assets with still 100 active M&A files,” Keywood wrote.
“We believe that WELL’s value creation plan will continue with still many target assets to acquire and good organic growth initiatives.As a result, we’ve increased our target multiple to 15x 2021 sales versus 12x prior, leading to a $7.00 target versus $5.35 previously,” Keywood said.
Looking ahead, Keywood is calling for WELL to generate fiscal 2020 (year end Dec 31) revenue and EBITDA of $44.8 million and negative $2.3 million, respectively, and fiscal 2021 revenue and EBITDA of $59.8 million and $5.6 million, respectively.
Disclaimer: Nick Waddell and Jayson MacLean owns shares of WELL Health and the company is an annual sponsor of Cantech Letter.
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