CareRx is still undervalued, Industrial Alliance says

Analyst Chelsea Stellick of iA Capital Markets likes the look of the new acquisition by specialty pharmacy services company CareRx (CareRx Stock Quote, Chart, News, Analysts, Financials TSX:CRRX). In a client update on Tuesday, Stellick reasserted her “Buy” rating and $7.00 target price, saying the new pickup of SmartMeds Pharmacy will consolidate CareRx’s leading position in the industry in Ontario.

CareRx (formerly Centric Health) is a Canadian-based provider of specialty pharma to senior care residents and home care operators. First public in 2009, until recently the company had specialty surgery and medical device distribution segments but sold them to pay off debts and focus on specialty pharmacy, where it has been building through acquisition in a fragmented field. At the end of its latest reported quarter, its Q3 2020, CareRx’s average number of beds serviced grew by 58 per cent year-over-year to 49,344.

CareRx announced on Tuesday a definitive agreements to buy SmartMeds Pharmacy, a specialty pharma company serving over 2,400 residents in long-term care, assisted living and other institutional settings in Ontario. The company operates a retail pharmacy in Burlington and licenses proprietary tech SmartLink, a real-time ordering and communication portal between homes and the pharmacy database.

The purchase price has been set at $4 million in cash, $475,000 worth of CRRX common shares and up to $2.925 million in cash for earnouts payable two years after closing, which is expected by the end of March. CareRx says the acquisition should be immediately accretive to the company’s earnings and is expected to contribute run-rate revenue of $13 million and EBITDA of $1.5 million on an annualized basis and prior to any benefits from the integration of the operations of the two businesses.

“SmartMeds has established an excellent reputation in the industry as a leader in innovation, quality, and customer service,” said David Murphy, President and CEO of CareRx in a press release. “It is a well-run organization with significant customer loyalty and a broad range of customers in both long-term care and other institutional settings. This is an exciting tuck-in acquisition for CareRx, and we look forward to working with the SmartMeds team and customers towards a seamless integration.”

In her report, Stellick called the SmartLink platform a differentiator and sees the SmartMeds buy as part and parcel of CareRx’s ongoing M&A strategy.

“At just over $3,000 per bed, or less than a 5x EBITDA multiple, this acquisition pricing provides immediate value to CRRX shareholders which will improve even further through integration synergies and cost rationalization. Moreover, 46 per cent of the deal value is dependent on the success of the acquired business through an earn out agreement payable 24 months after closing, which both incentivizes seamless integration and mitigates the immediate impact to CRRX liquidity,” Stellick wrote.

“Furthermore, we expect CRRX to reduce its net outlay by divestiture of the retail pharmacy. We believe CRRX will continue to execute on a roll up strategy, acquiring businesses at compelling multiples and maximizing operating leverage to create value,” she wrote.

Stellick values CareRx using an average of DCF, EV/EBITDA and EV/Revenue valuations, arriving at her unchanged $7.00 per share target, which at press time represented a projected 12-month return of 48.9 per cent.

Looking ahead, Stellick is projected CareRx to hit $164.1 million in revenue for the full 2020, $211.2 million for 2021 and $240.3 million for 2022. On adjusted EBITDA, she is calling for $12.2 million for 2020, $23.0 million for 2021 and $26.1 million for 2022.

CareRx last delivered financials on November 5, 2020, where its third quarter results featured revenue from Specialty Pharmacy of $45.6 million compared to $31.4 million a year earlier and adjusted EBITDA from Specialty Pharmacy of $4.9 million compared to $4.0 million for Q3 2019.

The third quarter saw CareRx further integrate recent acquisition of RemedyRx to its operations including consolidation of certain fulfillment centres, which the company said would be completed ahead of schedule by the end of the fourth quarter. The company also launched over the Q3 its “Pharmacy at Your Door” program to leverage its capabilities in reaching potential new markets.

“CareRx has established a formidable position as the industry leader in Canada. We remain laser-focused on the execution of our strategy, leveraging our capabilities and customer-focused culture to win new contracts, while continuing to pursue acquisition opportunities to strengthen our value proposition, expand our national platform, and generate further operational efficiencies. 2021 promises to be a productive year in this regard,” Murphy said in the third quarter press release.

Last year, CareRx completed its rebranding, having gone from Centric Health to CareRx in June, which included a new mission, vision and values statement delivered on December 16, 2020. The company said its vision is “To be Canada’s trusted leader providing innovative pharmacy solutions in partnership with the communities we serve.”