VitalHub (VitalHub Stock Quote, Chart, News TSXV:VHI) has had a strong run in 2020, returning 50 per cent year-to-date, but there should be more where that came from, says Eight Capital analyst Kevin Krishnaratne, who delivered an update to clients on Thursday where he kept his “Buy” rating but upped his target price on strong performance from the company.
Toronto-based VitalHub is a software company for health services providers in the fields of mental health, community health and regional hospitals. Now with over 200 customers worldwide, VitalHub has made eight acquisitions since going public in 2016, focusing on electronic health records (EHR), case assessment, patient flow and operational visibility markets.
VitalHub announced its third quarter results on Tuesday, showing revenue up 33.2 per cent year-over-year to $3.2 million and adjusted EBITDA of $502,595, which was down a touch from last year’s $523,669.
Over the quarter, VHI completed two acquisitions in UK-based patient flow management company Intouch with Health and UK-based healthcare analytics business Transforming Systems. The company also closed on a non-brokered private placement of one million shares at $2.20 each for gross proceeds of $2.2 million, with VitalHub saying the funds will go towards further M&A activity. Also and subsequent to the end of the Q3, the company closed on a bought deal for about $17 million, issuing about 5.8 million shares at a price of $2.90 per share.
On the company’s progress over the third quarter, CEO Dan Matlow underlined VitalHub’s focus on responsible growth, both organic and through M&A, saying the results are so far positive.
“Given the timing of our recent acquisitions, Q3 only saw a modest contribution to recognized revenue from our recent Intouch with Health and Transforming Systems Ltd. acquisitions. Notwithstanding this, both acquisitions have made significant impacts in terms of new, large-scale recurring licensing transactions which will positively impact future periods,” Matlow said in a press release.
“We grew our annualized contract value (ACV) by 81 per cent compared to the prior quarter, which was achieved through organic growth of $543,258 or 7.25 per cent, in addition to the lift attributable to the acquisitions of $5,525,327 or 73.8 per cent. We are pleased to see this same pattern of organic growth continuing into Q4 as well,” he said.
The Q3 revenue of $3.2 million was better than Krishnaratne’s $3.0-million estimate, while adjusted EBITDA of $500,000 was also better than his $300,000 estimate. Gross profit of $2.6 million was also ahead of his estimate of $2.1 million. The analyst pointed to stronger than expected software sales in the company’s EMR and Patient Flow solutions markets as contributing to the higher topline, as well as contributions from recent acquisitions.
On valuation, Krishnaratne is moving his target multiple from 4.0x 2021 Sales to 5.0x 2021 Sales to reflect momentum in the general healthcare services sector and within VHI’s key areas of focus.
“We remain bullish on VitalHub’s opportunity to capitalize on Digital Health trends in two key markets – Community-based EMR in Canada and Patient Flow software in global markets. We forecast ARR of $17.5 million by the end of 2021, reflecting organic growth of ~15 per cent,” Krishnaratne wrote.
By the numbers, the analyst said he has made no major changes to his 2021 estimates and is forecasting full 2020 revenue and adjusted EBITDA of $13.4 million and $2.2 million, respectively, and 2021 revenue and adjusted EBITDA of $21.5 million and $5.1 million, respectively.
On a comps basis, Krishnaratne’s new $4.00 target puts VHI above its peers in the Canadian Software sector but below its peers in the Canadian Consolidators sector.
“We justify our slight premium to the Canadian Software group given VitalHub’s exposure to Digital Health, which is an industry still in the very early stages that should provide the company with many opportunities for growth. We also note that the average revenue growth for this comp group is closer to 8 per cent versus the 15 per cent range we expect VHI to deliver in core software and services. As compared to the Canadian Consolidation group, our target reflects a discount given VHI’s smaller market cap, lower liquidity and its early stage in its M&A cycle versus the well-established peers in this group,” Krishnaratne said.
At press time, the analyst’s $4.00 target represented a projected 12-month return of 50.9 per cent.
On the Intouch acquisition, for £3,850,000 and announced on August 20, 2020, Matlow said in a press release, “With the advent of virtual healthcare visits growing within hospitals we feel Intouch’s product offering is appropriate and timely and anticipate an immediate impact on our overall business. We have partnered with Intouch already in Canada and look forward to growing this relationship as a single entity.”