Paradigm Capital launches coverage of VitalHub with a “Buy” rating

Paradigm Capital analyst Daniel Rosenberg Friday launched coverage of health IT solutions company VitalHub (VitalHub Stock Quote, Chart, News TSXV:VHI), starting off with a “Buy” rating and 12-month target of $4.15 per share.

Rosenberg said an attractive financial profile, record of successful M&A and industry tailwinds make the stock a compelling investment opportunity.

Toronto-headquartered VitalHub, whose technology is a spinout from Mount Sinai Hospital in Toronto, is a SaaS-based provider focused on enhancing interoperability and resource allocation in healthcare systems through a portfolio of EMR-complementary solutions. The company, which has over 300 clients across Canada, the US, the EU, the Middle East and Australia, is addressing what Rosenberg sees as a key problem in healthcare —interoperability. The analyst argued in his coverage initiation that healthcare has lagged in implementing basic technology solutions and has, for example, front-line workers and their respective organizations delivering care but operating in information silos without optimal communication or coordination between units, the result of which can be sub-optimal care for patients and, on a greater scale, inefficiencies and greater costs.

“VitalHub’s technology solutions help improve real-time visibility and communication between traditionally siloed healthcare workers, departments and organizations. In turn, healthcare administrators and providers can make more informed decisions around resource planning, demand forecasting and patient care delivery,” Rosenberg wrote.

The analyst pointed to VitalHub’s acquisition work as a positive for investors, calling management disciplined acquirers (the company has completed eight transactions to date). Rosenberg estimated that VHI typically acquires assets at below 2.0x sales and immediately capitalizes on synergies through its offshore development hub.

“We expect M&A activity to continue with over 400 potential targets in core geographies as the company looks to penetrate deeper into its footprint and add in complementary technologies,” Rosenberg said.

The analyst also likes VitalHub’s strategy of focusing on small and/or regional healthcare facilities as opposed to larger and more slow-moving bureaucratic organizations, with VHI working to tailor its offerings to facilities like rural hospitals, long-term care and outpatient centres. At the same time, Rosenberg thinks success with smaller organizations will likely lead to wins with bigger umbrella organizations, as was evidenced by VitalHub’s selection by the Nova Scotia Department of Community Services to improve the delivery of support and services, a $20-million contract won over some of the largest global healthcare players in an open RFP process, said Rosenberg.

Rosenberg emphasized the growing demand for more interoperable healthcare systems worldwide, which, according to a recent industry report, is expected to grow at a compound annual rate of 13.8 per cent over the next four years.

“Government regulatory agencies, including ones in the U.S., are requiring healthcare stakeholders to meet interoperability mandates,” Rosenberg wrote. “The market for global healthcare interoperability will reach $7.96 billion by 2024, compared to $4.17 billion in 2019. VitalHub’s solutions are deployed in countries that represent an estimated three-million beds. The company’s solutions are currently deployed in about one per cent of its geographic footprint. We believe VitalHub will continue to execute on greenfield opportunities and penetrate more deeply within its geographic footprint. There is also potential to expand into new geographies and capture an increasing amount of wallet share with cross- selling opportunities and new service offerings,” Rosenberg wrote.

On the numbers, Rosenberg sees VHI generating revenue and adjusted EBITDA in fiscal 2020 of $13.6 million and $2.6 million, respectively, and revenue and adjusted EBITDA in fiscal 2021 of $19.3 million and $3.7 million, respectively.

The analyst said COVID-19 has exposed some cracks in Canada’s healthcare system that VitalHub could help to seal.

“For a patient, the lack of coordinated information sharing may lead to sub-optimal care; for a larger healthcare system, it leads to inefficiencies and greater costs,” the analyst argued. “Over the past few months in Canada and around the world, we have seen very tangible (but solvable) examples of poor coordination between healthcare organizations, problems such as conflicting data as it relates to the number of COVID-19 cases, lags in reporting numbers and line-ups at testing facilities. Improving data visibility between organizations is a key first step in improving the coordination of care, as well as enabling proper resource planning for organizations and their front-line workers.

Rosendberg noted that VitalHub has grown aggressively in just a short period of time.

“Today, VHI delivers a suite of products to more than 300 customers, representing over 35,000 beds,” he said. The company’s recent acquisition of two U.K.-based patient flow and operational visibility software providers have nearly doubled the size of the company, bringing its annual contract value (ACV) to $13.0 million from $7.5 million as of last quarter. With ~70% recurring revenue, and double-digit EBITDA margins, VitalHub has an attractive financial profile. Double-digit organic growth will continue to be supplemented by M&A activity. We believe at current share prices VitalHub offers a very compelling investment opportunity for investors interested in the digitization of healthcare.

The analyst’s $4.15 target at press time represented a projected return of 54 per cent.