Scotiabank launches coverage of WELL Health with bullish target

In initiating coverage on WELL Health Technologies Ltd. (WELL Health Technologies Stock Quote, Chart, News, Analysts, Financials TSX:WELL), Scotiabank analyst Adam Buckham sets a target price of $10.00/share and a 25.2 per cent rate of return on the company’s shares within the next 12 months while opening with a Sector Perform rating.

An omni-channel digital health company with a number of business segments and operations in Canada and the United States, Vancouver-based WELL Health has put an emphasis on acquiring digital and physical healthcare assets since pivoting to the field in 2018, largely acquiring properties through various mergers and acquisitions. Though the company has made 35 acquisitions over the last three years, Scotiabank identifies as many as 1,000 additional opportunities in the sector, which could lead to a significant re-evaluation in the future.

Scotiabank’s target price was set based on a sum-of-the-parts valuation, Buckham said in his analysis.

“Within its current portfolio, WELL holds several businesses that we believe warrant separate multiples,” he said. “Thus, in evaluating the business, we believe that a sum-of the-parts valuation is the most accurate way to view the company.”

WELL Health’s revenue has grown in leaps and bounds from quarter to quarter, with the company’s Q1 2021 revenue of $26 million nearly tripling the $10 million reported in Q1 2020, while annual revenue is forecast by Scotia to increase from $50 million in 2020 to $271 million in 2021, potentially reaching as high as $471 million by 2023.

EBITDA forecasts are also looking favourable for the company according to Scotiabank, with recent acquisitions projected the company’s EBITDA eclipse the gross margin trajectory by 2023 while operating with multiples of 6.0x and 7.2x on clinics and software for EV/2022 sales, and 12.5x EV/2022E shareholder EBITDA for recent acquisition CRH Medical.

Buckham’s initial analysis of WELL Health is slightly more cautious than industry peers, with Laurentian Bank offering a Buy rating at a target price of $12.50 on the stock in May, while Beacon Securities moved from Speculative Buy to Buy on the company at a target price of $12.00 in June.

However, the $10.00 target is a base case in Scotiabank’s view, with a bullish view seeing the stock going potentially as high as $14.50/share.
The company has also overcome some adversity in its operations, the analyst noted, staving off a short-seller attack from Grizzly Reports following the CRH Medical acquisition, which was quickly debunked by Desjardins and Forge First Asset Management, with the latter believing the short to have been initiated by a hedge fund.

WELL Health has been busy recently, appointing Shane Sabatino, formerly president of TELUS Employer Solutions, as the company’s new Chief People Officer on June 10, while also adding Jamil Nathoo, former Goldman Sachs managing director for debt distribution, as the company’s new Senior Vice President of Capital Markets on June 29.

Most recently, WELL Health completed the previously-reported acquisition of Ontario-based health service provider MyHealth on July 15, with the pickup coming in at $206 million, plus a future conditional earn-out of up to $60 million.

“We extend a warm welcome from the WELL family to the talented MyHealth team,” said Hamed Shahbazi, Chairman and CEO of WELL in the company’s press release announcing the purchase. “The closing of this acquisition offers not only financial value for our shareholders, but also supports our value system at WELL as MyHealth has been built upon important pillars that we hold in high regard including: a progressive and award winning workplace culture; a forward-thinking network of health practitioners who embrace technology; and the vision of empowering patients through the provision of digital tools and technologies. We are very excited for the extended reach and depth that MyHealth offers WELL.”

In Buckham’s view, WELL offers investors unique exposure to both physical and digital healthcare trends, with other potential catalysts like future acquisitions, potential listing on an American stock exchange with increased exposure in the market, and increased concentration in higher-multiple segments potentially helping send the stock upward.

“With the recent closing of the CRH and MyHealth Partners (MyHealth) purchases, WELL’s financial profile has undergone significant financial transformation in 2021, and we believe that the company is now on a trajectory to generate in excess of $400 million in revenue per year,” he said. “However, although we see this as a positive investment backdrop overall, with shares up ~147% over the last 12 months, it seems clear that at least a portion of the current upside has already been reflected in the share price. Thus, at this time, while we are positive on the story, we await evidence of further catalysts before reassessing our view.”

At the time of publication, WELL Health was trading at $7.46/share on the Toronto Stock Exchange, up 10 cents from its Tuesday opening of $7.36/share.

Disclosure: WELL Health is an annual sponsor of Cantech Letter. Nick Waddell and Jayson Maclean each own shares of the stock.