WELL Health Technologies (WELL Health Technologies Stock Quote, Chart, News, Analysts, Financials TSX:WELL) received a coverage launch from PI Financial on Tuesday, with analyst Kris Thompson saying WELL should outpace healthcare sector growth projections as it scales up and acquires more businesses.
Founded in 2017, Vancouver-based WELL Health began as a yoga business before pivoting to acquiring family practice medical clinics in a push to fill out its digital-first operating model. In 2018, WELL divested its yoga business and acquired a total of 19 clinics in BC and then in 2019 began buying healthcare software vendors selling open-source Electronic Medical Record (EMR) solutions to clinics (OSCAR).
Over 2020, WELL made ten acquisitions, eight wholly-owned and two majority-owned, and two equity investments, along with completing three equity financings for gross proceeds of $118 million and a convertible debenture financing for $11 million which has since been converted.
Moving to the present, WELL has 27 clinics, the third-largest EMR business in Canada, telemedicine platforms in the US and Canada, a healthcare applications marketplace, cybersecurity assets and allied health assets. Last month, WELL completed its biggest acquisition to date in CHR Medical, a US-based gastroenterology business for US$372.9 million.
Commenting on WELL’s M&A capabilities, Thompson said the CRH acquisition will significantly boost WELL’s earnings over the coming quarters, leaving the company in a good position to deploy cash flow from the CRH acquisition towards new growth opportunities in the US.
“WELL is a healthcare consolidator, which requires ongoing cash infusions to execute M&A. While the Company has been active raising equity, the CRH acquisition catapults the consolidated cash flow visibility from approaching break-even to north of $30 million annually, and growing,” Thompson wrote.
“In addition, WELL is backed by billionaire Hong Kong investor Li Ka-Shing. Mr. Ka-Shing was the lead investor in the $302-million equity financing (at $9.80/sh) CRH acquisition financing, subscribing to a $100-million equity investment with a group of investors including Horizon Ventures,” he said.
WELL Health’s share price shot up in 2020, returning 416 per cent for the year, while so far in 2021 the stock has been up and down and is currently off almost 11 per cent.
Thompson sees more upside, starting WELL off with a “Buy” rating and $10.50 target price, which at the time of publication represented a projected one-year return of 46 per cent.
Looking at valuation, Thompson said WELL’s peer group in healthcare tech shows a wide range of multiples based on size, profitability, segment focus and growth. The analyst has derived his target from an EV/Sales multiple of 9.4x on his 2021 estimates and 7.2 on his 2022 estimates, whereas companies in the clinics and omni-channel healthcare space trade at 8.1x and 6.0x, respectively, and healthcare tech companies trade at 7.0x and 5.5x, respectively.
“WELL is a mixture of bricks & mortar clinics in Canada, technology solutions growing across its segments, and a cash flow generating services business in the US via the CRH acquisition. And the company will remain very active in acquiring new revenue streams,” Thompson wrote.
“As such, we expect the company to quickly grow into these valuation metrics, which over the course of a couple of years should become more attractive. At this point, investors are paying up for the growth opportunity in front of the Company, in a trillion dollar industry with plenty of runway,” he said.
By the numbers, Thompson thinks WELL will generate 2021 revenue and net EBITDA of $227 million and $34 million, respectively, and 2022 revenue and net EBITDA of $298 million and $52 million, respectively. (All figures in Canadian dollars except where noted otherwise.)
WELL last reported financials in March where its fourth quarter 2020 featured $17.2 million in revenue, up 75 per cent year-over-year, and adjusted EBITDA of $0.77 million versus a loss of $0.31 million a year earlier.
Thompson said WELL should have a number of catalysts over the near term for generating interest in the stock, including the company’s rapidly expanding EBITDA and cash flow generation, new accretive M&A, margin expansion and a potential NASDAQ listing to enhance investor interest.
“Given the sheer size of the healthcare market and WELL’s relatively small market share we expect the company to outpace industry growth rates such that a five per cent terminal rate is justified before M&A,” Thompson said.
“We are modelling additional M&A in our DCF in 2024 and attempt to normalize EBITDA margins to reflect what CRH had been achieving (~40 per cent) and modest improvement for the WELL businesses. We note that the Company is expected to remain very acquisitive and at this juncture investors need to have confidence in the M&A strategy and ability for the company to grow into its valuation through transformative M&A, organic cross-selling opportunities and iterative improvements in operational execution,” he said.
Disclaimer: Jayson MacLean and Nick Waddell own shares of WELL Health Technologies and WELL is an annual sponsor of Cantech Letter.