CareRx is a Buy, says Leede Jones Gable

CareRx (CareRx Stock Quote, Chart, News TSX:CRRX) is executing well in the highly fragmented long-term care pharmacy space, says Douglas W. Loe, analyst for Leede Jones Gable, who launched coverage of the stock on Tuesday with a “Buy” rating and $6.50 target.

Toronto-based CareRx, formerly known as Centric Health, is a provider of pharmaceutical distribution services to eldercare facilities in Ontario, Alberta and BC serving about 50,000 residents in over 900 seniors and other communities including long-term care homes, retirement homes, assisted living facilities and group homes.

The company first went public in 2009 as a physiotherapy and rehab service provider for seniors before diversifying into specialty surgery and medical device distribution in 2011. However, debt facilitated the divestment of those segments and culminating this year in a refocus on specialty pharmacy for long-term care in Canada and a rebranding as CareRx.

Announced in May of this year, the rebrand now comes with a new mission statement, published by CareRx on Wednesday, which puts the company’s focusing on “enhancing the health of Canadians with unique or complex medical needs” and becoming Canada’s trusted leader in innovative pharmacy solutions.

“Our new Mission, Vision and Values, alongside our recent rebrand, reaffirm our overriding commitment to ‘care’ for the residents we serve, their families and our home operator partners,” said David Murphy, President and CEO, in a press release. “Our new Mission, Vision and Values were developed through a ground-up, collaborative approach that involved employees from across the entire organization. They truly reflect what our company stands for and the corporate culture that drives leadership in our industry.”

In his coverage initiation, Loe said CareRx’s long-term debt level including convertible debt is still high in absolute terms at $75.5 million or at a 4.9x multiple of total debt/Q3 2020 EBITDA. At the same time, Loe pointed out this debt to EBITDA ratio is now at its lowest level reported by the firm since Q2 2017.

CareRx delivered its third quarter earnings in early November, showing 45-per-cent growth in revenue from continuing operations to $45.6 million and 37-per-cent growth in adjusted EBITDA from continuing operations at $3.8 million. CareRx, which in March of this year closed on the acquisition of Remedy’sRx for $44 million, said the integration of Remedy’s business has been coming along at an accelerated pace, with the Q3 data showing the first full period of contribution from Remedy.

“The integration of the Remedy’s business is ahead of schedule – now expected to be completed by year end – and we expect to begin to realize meaningful synergies in the first quarter of next year,” said Murphy in a November 5 press release.

On the Remedy deal, Loe wrote, “This was a transaction that we believed at the time and still do that was consummated on reasonable terms, and with abundant strategic value through scale-up in LTC Rx market share and achievable cost synergies that we expect over the next few quarters. For context, deal terms were T12M revenue of $60 million implied acquisition value of 1.4x trailing revenue, and about 9.2x EBITDA based on FQ320 EBITDA run-rate of $4.8 million as reported last month in consolidated FQ320 data.”

Loe said CareRx has already documented its ability to profitably grow by acquisition and that this growth strategy is expected to continue. The company has estimated that its two largest long-term care Rx competitors currently serve about 35,000 and 30,000 beds, respectively. With about 51,000 beds currently under management, the analyst estimated CareRx’s current market share in the long-term care Rx industry at about 19 per cent, with the company saying that it can double its bed count to 100,000 by the end of 2023.

“That seems achievable to us based on historic pace at which it achieved half of that goal already, and based on the extent to which the Canadian LTC Rx industry remains highly fragmented even after considering CareRx’s own consolidation initiatives,” Loe wrote.

“Moving forward, we project F2021 revenue/EBITDA of $198.9 million/$20.3 million (10.2 per cent margin), increasing to $206.0 million/$22.1 million (10.5 per cnt margin) in F2022 (the reference year in our valuation) and to $215.5 million/$23.5 million (10.7 per cent margin) in F2023, with our year-over-year top-line growth projections of four to five per cent assumed to be achievable through new contract wins from peers and not from any future acquisitions that would be supplemental to our baseline projections once consummated,” Loe wrote.

The analyst is valuing CRRX on a 10x EV/EBITDA multiple to his 2022 forecast of $22.1 million with his EV calculation incorporating cash at Q3 2020 of $20.6 million, total debt of $75.5 million and fully-diluted shares outstanding of 25.0 million.

As of publication date, Loe’s $6.50 price target represented a projected one-year return of 80.6 per cent.