Does WELL Health have even more upside?

Desjardins analyst David Newman likes the look of the new pickup by WELL Health Technologies (WELL Health Technologies Stock Quote, Chart, News, Analysts, Financials TSX:WELL), which expanded its presence in Ontario through the purchase of Ottawa-based healthcare provider ExecHealth. In a note to clients on Thursday, Newman reiterated his “Buy” rating and $10.50 target, saying WELL could be looking to raise more capital to keep its M&A engines running.

Vancouver-based WELL Health is an omni-channel digital health company operating primary clinics, an Electronic Medical Records (EMR) business, a telehealth platform as well as digital health, billing and cybersecurity-related tech solutions. WELL announced on Thursday an agreement to acquire ExecHealth, which specializes in corporate and executive health, primary care and integrated health services in the Ottawa region. The company operates a clinic in downtown Ottawa and has had more than half of its patient visits during the pandemic via telehealth consultations.

“We are pleased to announce our agreement to acquire ExecHealth and expand our network into Ontario, Canada’s largest healthcare market,” said Hamed Shahbazi, Chairman and CEO of WELL, in a press release.

“This proposed acquisition represents another milestone in the execution of our plans to further grow our presence in the premium margin corporate and executive health segment, building on our recent acquisition of ExcelleMD, a leading provider of such services in Québec,” Shahbazi said.

WELL said in the press release that ExecHealth, with over 1,000 clients currently and over two-thirds of its revenues attributable to recurring membership fees, had unaudited revenue of $3 million over the 12 months ended February 28, 2021, with EBITDA margin over 50 per cent. WELL said ExecHealth is a high-growth business which has organically grown revenue and EBITDA at over a 20-per-cent clip over the past three years.

WELL has agreed to pay up to $12.6 million for ExecHealth, with $6.5 million in cash, $4.2 million in common shares and up to $1.9 million in performance-based earnouts, with the deal expected to close in early May.

Newman figured the deal, pre-earnout, at multiples of 3.6x revenue and 7.2x EBITDA, saying, “While the transaction is small, we view it favourably given ExecHealth’s omni-channel model, accretive margin profile, recurring revenue, strategic geographical expansion and strong fit within WELL’s overall portfolio and strategy.”

“We believe the premium for ExecHealth (versus WELL’s previous clinic acquisitions of ~0.3–0.6x revenue) is justified given its omni-channel and multidisciplinary clinic with a focus on executive health, high EBITDA margins of >50 per cent and organic growth rate of >20 per cent,” Newman wrote.

“It also marks WELL’s entrance into Ontario, Canada’s largest healthcare market. Recall that WELL paid ~1.4x revenue for ExcelleMD in December, 2020, which also operates a network of omni-channel, executive health clinics and a telehealth platform (VirtuelMED), and marked WELL’s entry into Québec. We believe WELL will continue looking expand into other markets, such as Toronto,” Newman said.

WELL’s share price jumped in early February on news of the proposed acquisition of US-based gastroenterology clinic company CRH Medical, taking WELL close to the $9.00 per share mark. The stock has fallen back since and currently trades in the mid-$7.00 range.

But Newman sees further upside to the name, with his $10.50 target at press time representing a projected 12-month return of 39 per cent.

WELL gave a corporate update in late March, saying the company recorded a 52-per-cent increase in patient visits across all its channels between Q4 2020 and Q1 2021, with the growth being attributed to organic and inorganic means. WELL said its Canadian operations continued to show improvement in profitability and cash flows over the first quarter of the year, while the CRH deal will see a special meeting of CRH security holders on April 16 to decide on the acquisition, with CRH’s board having unanimously recommended the move.

On WELL’s path ahead, Newman has estimated its current cash position at about $12.5 million, pro forma the Exec Heath and other recently announced acquisitions.

“To backstop the roughly eight or nine LOIs in the pipeline (which could bring its run-rate revenue to >$400 million and EBITDA to >$100 million), we believe WELL may look for another cash injection before it harvests FCF from CRH and the base business ramps in profitability,” Newman said.

The analyst thinks WELL will generate 2021 revenue and adjusted EBITDA of $237 million and $40.0 million, respectively, and 2022 revenue and EBITDA of $343 million and $78.0 million, respectively.

Earlier this week, WELL closed on its acquisition of Vancouver-headquartered healthcare software company Intrahealth for $19.25 million. Intrahealth, with customers in Canada, New Zealand and Australia, generated about $9 million in revenues over the past 12 months with over 20 per cent in EBITDA margin, with WELL saying the addition will expand its EMR capabilities beyond solely providing OSCAR EMR services to a range of EMR product offerings in global markets.

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