CareRx has a 30 per cent upside, says iA Capital

Chelsea Stellick of iA Capital Markets has slightly cooled her perspective on CareRx Corporation (CareRx Corporation Stock Quote, Chart, News, Analysts, Financials TSX:CRRX), lowering her target price to $9.00/share from $9.50/share while maintaining a “Buy” rating in her latest client update on Tuesday.

Headquartered in Toronto, CareRx (formerly Centric Health) is currently Canada’s largest provider of specialty pharmacy services, with over 52,000 residents in over 900 seniors communities (representing a 12-per-cent market share by number of beds), including long-term care (LTC) homes, retirement homes, assisted living facilities and group homes in Ontario, Alberta, British Columbia and Saskatchewan.

Stellick’s re-evaluation comes after CareRx released its second quarter financials earlier this week, which ended up either in line with or slightly below iA and consensus projections.

CareRx reported a 25 per cent year-over-year increase in revenue from continuing operations, jumping to $49.7 million from $39.7 million, along with a 54 per cent increase in adjusted EBITDA from continuing operations from $2.8 million to $4.3 million.

CareRx has been busy throughout 2021, having completed a $102.3 million agreement ($63.3 million in proceeds, $39 million in incremental debt with company lenders) to acquire Medical Pharmacies Limited’s long-term care pharmacy division, which is expected to close by the middle of September while bringing 18 facilities and approximately 36,000 patient beds under the CareRx umbrella, with an expected run-rate annualized revenue of approximately $150 million with adjusted EBITDA between $10 and $12 million.

The company also acquired the long-term care pharmacy services division of Rexall Health Solutions to add approximately 4,000 beds across Ontario and northern Alberta with a run-rate annualized revenue of approximately $14 million, before completing the run on acquisitions with SmartBeds to add another 2,400 beds in Ontario with an expected annualized run-rate revenue of $13 million and adjusted EBITDA of $1.5 million.

“Our second quarter results reflect the continued execution of our growth strategy, with a 25 per cent year-over-year increase in revenue and 54 per cent increase in Adjusted EBITDA as we realized the contribution and synergies from the Remedy’s and SmartMeds acquisitions,” said David Murphy, President and CEO of CareRx in the company’s August 9 press release.

“We are on track to close the MPGL Acquisition by mid-September, and we are confident that the integration and resulting synergies will enable us to realize further efficiencies in our business, expand our Adjusted EBITDA margin, and create competitive advantages that will position us for continued growth and market share gains,” Murphy said.

The quarterly update has led to some revisions in Stellick’s financial forecasts and estimates for the company as she now projects $244.3 million in revenues for 2021 (previously $239.7 million) and a projected 50 per cent year-over-year increase from the $162.2 million reported in 2020. For 2022, Stellick is now calling for revenue of $392.5 million (previously $392.6 million), which would represent a 60.7 per cent year-over-year increase.

On EBITDA, Stellick has lowered her estimate for 2021 to $21.9 million (8.96 per cent margin) from $25.7 million (10.7 per cent margin), representing a 71.1 per cent year-over-year increase. That is forecasted to jump to $44.9 million (11.3 per cent margin) in 2022 now slightly below the previous estimate of $48.7 million (12.4 per cent margin). EPS projections still track toward a positive return beginning in 2022, though the return has dropped to $0.05/share instead of the original $0.17/share.

Stellick sees CareRx’s EV/Revenue multiple projections rising to a projected 1.1x in 2021 from 1x in 2020, then dipping to a projected 0.7x in 2022. The EV/EBITDA multiple is forecasted to drop from 21.2x in 2020 to a projected 12.3x in 2021, with another fall to 6x forecast for 2022.

“Our target price of $9.00/share (previously $9.50/share) is determined by the average of three valuation methods: 1) EV/Revenue, 2) EV/Adj. EBITDA, and 3) Discounted Cash Flow (DCF). The combination of these three approaches allows for a balanced valuationsince EV/Revenue acknowledges the value ascribed to CareRx’s recent acquisitions, while EV/EBITDA implies the requirement torealize on synergies and the DCF incorporates the time value of money, otherwise ignored. Due to the substantial upside expected as CareRx executes on organic and inorganic growth initiatives, we maintain our Buy recommendation,” Stellick wrote.

Though her target price has dropped slightly, CareRx hitting previously-outlined benchmarks is enough for Stellick to maintain an overall positive view of the company.

“When we initiated coverage, CRRX had set out a goal to expand beds under contract to 100,000 by 2023,” she said. “Following the SmartMeds, MPGL and Rexall acquisitions adding approximately 2,400, 36,000 and 4,200 beds, respectively, the company is well on its way to reaching this goal ahead of schedule. We anticipate that CRRX will nearly reach its target of 100,000 beds by the end of 2021 and will continue to add a run-rate of 10,000 beds per year.”

At press time, Stellick’s $9.00 target represented a projected one-year return of 30.1 per cent.

CareRx’s share price has done really well this year and is currently up 74 per cent.

Last week, CareRx received clearance under the Competition Act for the acquisition of long-term care pharmacy division of Medical Pharmacies Group Limited. The company said its receipt of the no action letter saying that the Competition Bureau does not intend to challenge the acquisition satisfies one of the closing conditions of the acquisition.