Greenbrook TMS has a 26 per cent upside, says Desjardins

Desjardins analyst David Newman resumed coverage of Greenbrook TMS (Greenbrook TMS Stock Quote, Chart, News, Analysts, Financials TSX:GTMS) on Tuesday, saying a new equity offering will be a shot in the arm to the company’s balance sheet. Newman renewed his “Buy” rating for the stock with a lowered target price of C$20.00 (previously C$24.00), which at the time of publication represented a projected one-year return of 25.7 per cent.

Greenbrook TMS operates 128 treatment centres across the US providing Transcranial Magnetic Stimulation (TMS) therapy for the treatment of depression and other mental health disorders. TMS uses electromagnetic stimulation to specific regions of the brain associated with mood regulation, with Greenbrook having now treated over 17,000 patients with more than 620,000 TMS treatments.

The company announced on June 14 the completion of a $23.5-million private placement, issuing about 2.35 million shares at $10.00 per share. Greenbrook said it will use the proceeds to develop new TMS treatment centres and for working capital and general corporate purposes. (All figures in US dollars except where noted otherwise.)

The placement was led by new investors Masters Special Situations (MSS) which owns about 1.15 million shares of GTMS, while existing shareholder Greybrook Health acquired 200,000 more shares to put its ownership of GTMS at about 4.5 million shares or about 28.1 per cent of issued and outstanding shares. Another group, 1315 Capital, acquired about 303,000 shares through the placement and now owns about 12.9 per cent of the total outstanding shares. MSS, Greybrook Health and 1315 Capital have all concurrently also received the right to appoint a nominee to Greenbrook’s board.

Newman said the private placement achieves a number of things for Greenbrook. First, it bolsters the company’s liquidity, which as of May 14 was good for about two months of operating and investing activities; second, it effectively satisfied a covenant from Oxford Finance requiring the raising of at least $12.5 million in equity and/or subordinated debt to avoid default on the credit facility; and third, it gives GTMS more funds to start up new TMS centres.

“While it did not expect to access the $15 million in delayed-draw term loans (three tranches of $5 million within 24 months) given specific financial milestones were not achieved, the company is confident the first $5 million will be available for potential M&A. We estimate a cash burn rate of ~$2–3 million per quarter,” Newman wrote.

Greenbrook delivered in mid-May its first quarter operational and financial results, showing new patient starts up by 19 per cent year-over-year but a four-per-cent year-over-year drop in treatment volumes, chalked up to seasonal factors. Revenue for the quarter was flat year-over-year at $11.3 million compared to $11.4 million a year earlier, while the net loss was $0.56 per share compared to a loss of $0.39 per share for the previous year’s Q1.

The company added three new TMS centres over the first quarter, with nine more in development at the quarter’s end. President and CEO Bill Leonard said Greenbrook had a better operational performance in the month of March, leaving the company in line for a strong second quarter.

“We are very pleased with our start to 2021, with a return in consolidated revenue to pre-COVID-19 levels in Q1 2021. We experienced record monthly highs in new patient starts and treatment volumes in March 2021 despite temporary closures of some of our TMS Centers due to significant weather events in the first half of the quarter, and the continuing challenges of the COVID-19 pandemic,” Leonard said in a press release.

Newman said Greenbrook’s $11.3-million first quarter topline was in line with his estimate and the company’s pre-release range of between $11.1 and $11.4 million but that the Q1 adjusted EBITDA of negative $4.0 was a miss of his negative $2.9 million estimate as well as the consensus negative $3.3 million.

“GTMS noted a return to normalcy in TMS demand (March was a record-breaking month). It remains on track for 140 locations by mid-2021 (currently at 128), with the footprint increasingly being used to roll out additional services (Spravato, psychedelics),” Newman said. “The provision for adjustment to variable consideration estimate should decline throughout 2021, reflecting higher collection on claims under state-wide credentialling.”

The analyst has reassessed his forecast and is now calling for 2021 revenue and EBITDA of $57.2 million (previously $60.7 million) and negative $8.2 million (previously negative $2.9 million) and for 2022 revenue and EBITDA of $83.5 million (previously $86.1 million) and $7.5 million (previously $11.2 million).

“GTMS has worked through its near-term capital constraints and should be able to pursue organic and acquisition growth opportunities, especially with a recovery post-pandemic and greater awareness of mental health issues,” Newman said.