WELL Health upgraded to “Buy” at Desjardins

Desjardins analyst David Newman likes the look of the new acquisition by WELL Health Technologies (WELL Health Stock Quote, Chart, News, Analysts, Financials TSX:WELL), which he has upgraded to a “Buy” (previously “Hold”) in a client report on Monday. Newman says WELL Health has first-mover advantage and a scalable hybrid primary healthcare model in its clinics and digital offerings, along with a robust M&A pipeline and double-digit organic growth prospects and expanding margins and cash flows due to the current shift toward digital offerings in healthcare.

Omni-channel digital health company WELL Health Technologies has businesses along a number of verticals. The company owns and operates 27 primary clinics, has an Electronic Medical Records (EMR) business servicing about 2,200 healthcare clinics, has telehealth services in Canada and the US and provides digital health, billing and cybersecurity solutions.

WELL on Monday annouced the acquisition of Intrahealth, an enterprise-class EMR and clinical healthcare software provider founded in New Zealand but now headquartered in Vancouver, with business in Canada, New Zealand and Australia. The deal, which is expected to close during the second quarter of this year, is a share purchase agreement for a total consideration of $19.25 million to be paid with about $11.5 million in cash and about $3.85 million in common shares and up to a $3.85-million three-year earnout based on annual recurring revenue targets.

“The proposed acquisition of Intrahealth expands WELL into a multi-product EMR company that can service small primary healthcare clinics right up to large hospitals and health authorities,” said Hamed Shahbazi, WELL’s Chairman and CEO, in a March 8 press release.

“We are very excited about the prospect of initially expanding our global footprint into New Zealand and Australia through this acquisition and pursuing further global expansion. Intrahealth is a highly complementary acquisition which will be immediately accretive to WELL’s revenue and profitability,” Shahbazi said.

Looking at the deal, Newman said with about $9 million in revenue over the last 12 months of which more than 80 per cent is high-margin recurring revenue, the acquisition implies about a 1.7x multiple on revenue or about 2.1x with the earnout and about an 8.6x multiple (about 10.7x with the earnout) on EV/EBITDA. Newman said the valuation is attractive when compared to WELL’s past EMR deals, which came in at about 3.5x-4.0x revenue.

The analyst gave a number of points in the deal’s favour, saying it will expand WELL’s addressable market in EMR and “firmly position it as an international operator with a multi-product business.” Newman also pointed to benefits in marketing Intrahealth’s Profile EMR alongside WELL’s OSCAR Pro, in integrating Intrahealth into WELL’s apps.health marketplace and thus paving the way for third-party developers to have the digital health apps available for both OSCAR Pro and Intrahealth.

“We welcome the news as a retracing back to WELL’s core advantage as a hybrid healthcare provider,” Newman wrote. “We are upgrading to Buy (from Hold) given the United Digestive re-sign by CRH, stronger digital health SaaS revenue with high-margin recurring revenue, Intrahealth’s attractive valuation and a potential US listing.”

Pro forma the deal closing, Newman now estimates WELL’s run-rate revenue at about $280 million, with about $19 million in funds available to backstop the company’s roughly eight to ten Letters of Intent currently in its pipeline.

For the upcoming fourth quarter 2020, Newman thinks WELL will generate revenue and adjusted EBITDA of $17.2 million and $0.3 million, respectively, implying full 2020 results of $50.3 million in revenue and negative $0.5 million in adjusted EBITDA. For 2021, he is calling for revenue of $233 million and adjusted EBITDA of $36.5 million and for 2022 he is calling for revenue of $342 million and adjusted EBITDA of $74.2 million.

WELL’s share price finished 2020 up 416 per cent, while so far in 2021 the stock is down five per cent.

Newman sees upside to WELL this year, and with the update he has reasserted his $10.50 target price, which at the time of publication represented a projected 12-month return of 37.6 per cent.

“WELL traded in the range of ~9–12x NTM revenue in the six months leading up to the CRH acquisition (announced one month ago) but declined to ~4x post-deal. Our target price of $10.50 is based on 6.5x our 2022 revenue and our DCF. WELL is trading at 3.6x on 2022 versus its clinical peers at 1.8x and healthcare tech at 5.9x,” Newman wrote.

WELL on February 8 announced an agreement to acquire CRH Medical, a gastrointestinal and anesthesia company operating across 13 states in the US. On February 23, CRH announced it had signed a five-year exclusive management services agreement with United Digestive, the company’s largest customer with whom its existing professional services agreement is set to expire in November. In a note to clients on February 23, Newman called the re-signing a positive for WELL as it derisked the CRH acquisition.

Disclaimer: Nick Waddell and Jayson MacLean own shares in WELL Health and the company is an annual sponsor of Cantech Letter.