Desjardins analyst David Newman renewed coverage of WELL Health Technologies (WELL Health Technologies Stock Quote, Chart, News TSX:WELL) on Thursday with a “Buy” rating and new $10.00 target, saying the company is flush with cash and ready to make some noise on the M&A front.
Digital healthcare company WELL Health owns and operates 20 primary healthcare clinics in Canada, has the country’s third-largest electronic medical records (EMR) business and operates a telehealth platform. The company announced on Thursday the completion of an $80.5-million bought deal public offering (including over-allotment), which comes less than a month after closing a $23-million private placement.
With the bought deal financing, WELL intends to spend the proceeds on acquiring more clinical and digital assets as well as general working capital. On the financing, CEO Hamed Shahbazi said in a press release, “We wish to thank the investment community who has once again shown us tremendous support in our quest to empower doctors and patients with technology to improve health outcomes.”
In his coverage resumption, Newman said the new funds should bring WELL up to more than $100 million in dry powder to serve its M&A purposes, which include over ten signed LOIs and could boost the company’s run-rate revenue to about $100 million by the first quarter of 2021.
Newman noted a number of other moves WELL has made this quarter, including: establishing three new business units in WELL Digital Health Apps, Cybersecurity and Allied Health, expansion into the US telehealth sector with the purchase of a majority stake in Circle Medical and the launch of its apps.health digital marketplace, a platform for third party app developers to market their products and for healthcare practitioners to find digital tools. WELL says there are currently 13 featured apps on apps.health and they expect that number to triple by mid-2021.
With these recent events in mind, Newman has made changes to his forecasts given the anticipated M&A activity and expectations for strong growth across the company’s five business units.
“We are keeping our 2020 estimates relatively intact but have increased our 2021 and 2022 estimates on the back of WELL’s significant pipeline of acquisition opportunities, which could increase its run-rate revenue to ~C$100 million in 1Q21. In terms of profitability, as discussed in our previous note, management expects Canada to become EBITDA profitable by the end of 2020, while the US could incur small losses as WELL/Circle forges ahead with its US expansion. We model minor losses in 1Q21 before the company breaks into positive territory in 2Q21,” Newman wrote.
The analyst is calling for 2020 revenue and adjusted EBITDA of $43.9 million and negative $1.4 million, respectively, for 2021 revenue and adjusted EBITDA of $96.5 million and $4.3 million, respectively, and for 2022 revenue and adjusted EBITDA of $137.7 million and $19.8 million, respectively.
On the acquisition possibilities, Newman said that while WELL’s EMR business has seen a lot of activity, having had six EMR acquisitions and with WELL now owning 95 per cent of traditional OSCAR EMR players in Canada, but the company may be moving its attention to other areas.
“Given its dominant position in the OSCAR EMR market, we believe WELL may shift its M&A focus toward other segments, including clinics, allied care, digital and cybersecurity, which we have discussed extensively,” Newman wrote.
On valuation, Newman is bumping up his target from $9.50 to $10.00 based on a 9.0x multiple of his 2022 revenue estimate, backstopped by his discounted cash flow estimate.
By comparison, the analyst sees WELL to be currently trading at 11.3x and 7.9x his 2021 and 2022 revenue estimates, respectively, whereas he sees the company’s healthcare technology peers to be trading at 9.3x and 7.7x on average, respectively.
Newman noted that Desjardins will be hosting an inaugural Digital Healthcare Conference on November 24, 2020, with representatives from public and private digital healthcare companies (including WELL), insurance providers and other industry reps.
As of press time, Newman’s $10.00 target represented a projected 12-month return of 30.9 per cent.
On Friday, WELL announced an agreement to purchase 51 per cent of shares of private BC-based company Easy Allied Health, a network of allied health professionals in the fields of physiotherapy, occupational therapy, kinesiology, and counselling and is a group with which WELL’s clinics have already been working.
The $1.1-million deal will give WELL the right to acquire the remaining 49 per cent of shares pursuant to a call option.
“Due to the versatile nature of Easy Allied's service delivery capabilities and their contracts with long-term care homes, Easy Allied was able to provide valuable essential services during the COVID-19 pandemic and demonstrate significant value to their patients. Easy Allied has also been a trusted partner to WELL clinics and has earned the trust of many of our physicians for their top-notch service and ability to improve health outcomes,” Shahbazi wrote in a press release.
Disclaimer: Nick Waddell and Jayson MacLean own shares of WELL Health Technologies and the company is an annual sponsor of Cantech Letter.