CB2 Insights: the sky’s the limit, says Mackie Research

Despite its share price rise, Mackie Research analyst Yue Ma thinks CB2 Insights (CB2 Insights Stock Quote, Chart, News CSE:CBII) is undervalued compared to its peers. In a coverage launch on Monday, Ma started off CB2 with a “Speculative Buy” rating and $1.10 target price, which at press time represented a projected 12-month return of 86 per cent.

Operating under the brand Skylight Health, CB2 owns over 30 clinics across 13 states in the US and employs more than 200 clinical professionals seeing over 110,000 registered patients a year. Before being acquired by CB2, most of those clinics had provided medical cannabis services to patients, while CB2 transformed the clinics into primary and urgent care services delivered both onsite and via telemedicine. CB2 calls itself one of the largest integrative health practices in the country, incorporating primary and urgent care with sub-specialties and integrative health.

Ma called CB2 a fast-growing healthcare services and technology company which has opportunity for organic and inorganic growth. On the organic side, Ma said CB2 has an enormous market to draw upon in the estimated 33 million US citizens currently without medical insurance, while inorganically, CB2 is likely to continue acquiring primary clinics in the current “highly fragmented” US market, according to Ma.

“We expect CB2 to transform its newly acquired clinics to provide both onsite and telemedicine services. CB2 has built a pipeline of accretive acquisition targets that have generated combined annual revenues of over $10M and annual profits of $2M million –the company is currently in negotiations in three potential transactions. We believe CB2 is disciplined in acquisition metrics – the company is looking for a price in the range of 0.3x – 0.75x revenues,” Ma wrote.

CB2 last delivered quarterly results in August where its second quarter 2020 results featured the company’s first EBITDA-positive quarter. The company posted revenue of $3.7 million compared to $3.2 million a year earlier and adjusted EBITDA of $0.37 million compared to a loss of $0.79 million a year earlier. CB2 said it had consecutive months of profitability over April, May and June 2020, driven by improved operating margins and topline growth.

“CB2’s clinic business should be high-margin as the current telemedicine platform is sufficient to support patient expansions and as the company pays wages to its doctors rather than splitting revenues with them (most Canadian clinics pay 60-70 per cent of their revenues to doctors…”

“Despite the significant uncertainties facing our business caused by the pandemic, we are delighted to report the first EBITDA positive quarter in the company’s history. Our operations continue to demonstrate resilience to the economic headwinds as demonstrated by the healthy revenue growth. In addition, we now have a strong balance sheet, a cash generating business and strong support from our anchor investors, which allows us to be more aggressive in pursuing some highly attractive and accretive acquisitions,” said CEO Prad Sekar in a press release on August 31.

CB2, which went public in March, 2019, via reverse takeover, has seen its share price take off since September, rising from $0.15 on Sept. 1 to $0.59 by Friday’s close. Even so, Ma sees the stock as attractive.

“We believe the company is still undervalued compared to its peer companies in the primary care/telemedicine sector. Based on our financial estimates, the stock is currently trading at a 5.9x 2020 EV/Sales ratio (vs. 19.4x for the sector) and a 4.0x 2021 EV/sales ratio (vs. 11.9x). We view CB2 as an attractive telemedicine play which growth investors should own,” Ma wrote.

Looking ahead, Ma thinks CB2 will generate 2020 revenue and fully diluted EPS of $13.5 million and negative $0.04 per share, respectively, 2021 revenue and fully diluted EPS of $20.0 million and negative $0.02 per share, respectively, and 2022 revenue and fully diluted EPS of $24.2 million and $0.00 per share, respectively. (All figures in Canadian dollars except where noted otherwise.)

“CB2’s clinic business should be high-margin as the current telemedicine platform is sufficient to support patient expansions and as the company pays wages to its doctors rather than splitting revenues with them (most Canadian clinics pay 60-70 per cent of their revenues to doctors). CB2 achieved its first EBITDA-positive quarter in Q2 2020. We expect the company to turn cash flow positive by mid 2021,” Ma wrote.

Last week, CB2 announced the completion of an early debt conversion of a promissory note held by US private equity fund Merida Capital Partners, with the principal amount of US$3 million to be converted in full and Merida granted about 10.4 million shares at $0.38 per share. The move wipes out all of CB2’s long-term debt and comes after an over-subscribed private placement of $5.13 million, with management putting the company’s current cash position at $5.5 million.

“We continue to focus the company to be on the offensive and establish the foundation for rapid growth in the US healthcare market,” said Sekar in a press release. “The early conversion of our promissory note from Merida continues to validate our strength in the US with a strong financial partner that is committed to supporting our growth.”