Paradigm Capital analyst Daniel Rosenberg is staying bullish on WELL Health Technologies (WELL Health Technologies Stock Quote, Chart, News, Analysts, Financials TSX:WELL) after the health tech company’s latest acquisition. Rosenberg delivered a report to clients on WELL on Tuesday where he reasserted his “Buy” rating and raised his target price to $12.75 (previously $11.75), saying the company’s now-proven acquisition strategy is likely to keep accelerating.
WELL Health plays in a number of verticals including a growing group of primary healthcare clinics (currently at 27 clinics), an Electronic Medical Records (EMR) business which is now the third-largest in Canada and serves about 2,200 clinics across the country, tele-health services in Canada and the US, cybersecurity capabilities as well as allied health and a health applications platform.
WELL looks to be adding another business segment with its latest announcement, an agreement to acquire CRH Medical, a gastroenterology and anesthesia-focused company, for about US$293 million. The deal will see WELL pay US$4.00 per share in cash for CRH, which would represent an 83 per cent premium to last Friday’s close. WELL concurrently announced an equity raise of $295 million at $9.80 per share. (All figures in Canadian dollars except where noted otherwise.)
CRH has most of its business in the US where it serves about 69 ambulatory surgery centres across 13 states and with partners in 48 states. The WELL press release puts CRH’s revenue run-rate at over $120 million with about 40-per-cent EBITDA margins and over 25-per-cent free cash flow margins.
WELL said even without considering potential synergies between their operations, CRH is expected to be accretive to WELL in 2021 to the tune of about 120 per cent on a revenue-per-share basis and 800 per cent on an EBITDA per share basis.
On the synergistic opportunity with CRH, WELL said it intends to deliver its suite of digital tools, tech-enablement and data protection solutions to CRH’s network.
“This will be a monumental acquisition for WELL as it will significantly boost our revenue and EBITDA profile, dramatically enhance our US operations and provide us with additional inorganic and organic growth opportunities,” said Hamed Shahbazi, Chairman and CEO of WELL, in a February 8 press release.
Its largest acquisition to date, WELL is financing the purchase with cash on hand, a new debt facility and the $295.5-million non-brokered private placement led by Hong Kong investor Li Ka-shing, who is already a WELL investor, and an as-yet unnamed set of “leading Canadian and US-based financial institutions,” according to WELL. The transaction is expected to close during the second quarter 2021.
In his review of the deal, Rosenberg said CRH has itself grown through an M&A strategy with about 30 transactions completed to date and an active pipeline of over 500 targets. Rosenberg said there’ll be an opportunity for WELL to cross-sell its services to modernize CRH’s gastroenterology (GI) practices across its footprint.
“In the near term, WELL’s telehealth platform is a strong fit for deployment,” Rosenberg said. “WELL believes there are number of digital solutions that could be adopted in the GI field to drive meaningful value. Most valuable in our view is the opportunity to continue WELL’s M&A strategy in a new vertical (GI) and much larger market, the US.”
“WELL’s valuation premium has made the use of equity a very powerful tool in its acquisition model. The free cash flow profile of CRH provides access to more capital (and without the dilutive impacts of equity financings) for WELL to deploy,” Rosenberg said.
With the new event, Rosenberg has revised his forecast for WELL and is now calling for revenue of $50.1 million for 2029 (unchanged), $225.7 million for 2021 (was $117.2 million) and $343.1 million for 2022 (was $157.5 million). On earnings, the analyst is calling for adjusted EBITDA of negative $0.7 million for 2020 (unchanged), $44.2 million for 2021 (was $5.2 million) and $75.6 million for 2021 (was $18.7 million).
With the new estimates, the analyst has arrived at his new target price of $12.75, which at press time represented a projected 12-month return of 42 per cent.
Rosenberg said he fully expects WELL’s M&A activity to not only continue but to increase in frequency and scale.
“WELL is establishing itself as a technology leader in the healthcare sector. For investors it is an M&A compounder, which can drive value with the massive healthcare market that is ripe for digital transformation. Secular changes accelerated by the pandemic are strong tailwinds that support WELL’s strategy to leverage technology and drive efficiencies in healthcare – in turn improving patient outcomes and generating shareholder value,” Rosenberg said.
WELL’s share price jumped 12 per cent on Monday on the acquisition announcement, bringing its 2021 return-to-date to 11.6 per cent. WELL finished 2020 up 416 per cent.
[Disclaimer: Nick Waddell and Jayson MacLean own shares in WELL Health and the company is an annual sponsor of Cantech Letter.]