Desjardins says Well Health is a Buy

Desjardins analyst David Newman remains resolute regarding WELL Health Technologies (WELL Health Technologies Stock Quote, Chart, News, Analysts, Financials TSX:WELL), reiterating his “Buy” rating with a target price of $10.50/share for a potential return of 37 per cent in an update to clients on Monday.

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. The company has verticals in Electronic Medical Records (EMR), a string of primary care clinics across Canada, executive health clinics, telehealth businesses in Canada and the US, a digital health applications platform and billing and cybersecurity-related solutions.

Newman’s most recent analysis comes after WELL Health released second quarter financial results that beat previously-outlined expectations.

“We believe the company is on track to meet its 2021 goals to build out and refine its practitioner enablement platform and deploy both internally and externally; achieve organic growth across all of its operating units; continue to make accretive acquisitions; further employ cost-saving strategies such as more tech enablement in the CRH business to boost margin expansion; improve operating cash flows through optimization of operations; and increase market share of its digital health products and virtual care programs,” Newman wrote.

WELL Health reported $61.8 million in total revenue for the quarter, setting a new company record while producing a 484.2 per cent year-over-year growth in relation to the same period in 2020, and a 141.7 per cent improvement over the first quarter of 2021. (All figures in Canadian dollars except where noted otherwise.)

The company also produced a positive adjusted EBITDA for the third consecutive quarter, with the reported $11.9 million coming in ahead of Newman’s projection of $9.3 million.

Major contributors to the company’s record growth include a 432 per cent year-over-year increase in the company’s virtual services revenue, as well as the acquisition of CRH Medical Corporation, which provides gastroenterologists throughout the United States with services and products to treat gastrointestinal diseases, for US$286.6 million in April.

From a patient perspective, WELL’s omni-channel patient visits grew by 19 per cent from quarter-to-quarter, registering 559,008 total visits in the quarter with in-person visits accounting for 43 per cent of the quota.

After netting a record US$39.3 million in the quarter for 190 per cent year-over-year growth, CRH Medical made a move of its own, acquiring a majority stake in Greater Washington Anesthesia Associates, which performs gastrointestinal anesthesia services at two endoscopic surgery locations in Gainesville and Warrenton, Virginia, which the expects to be accretive with an annual revenue run-rate of US$3.3 million, with operating EBITDA margins of approximately 50 per cent while bringing 12 more practitioners on board.

WELL is also looking to expand CRH’s product set from two lines to five, and CRH is negotiating the sale of WELL’s cybersecurity service to a clinic within its network.

“This marks our fourth acquisition since joining WELL and increases our footprint to a total of 77 endoscopy sites,” said Dr. Tushar Ramani, CEO of CRH in the August 3 press release announcing the Greater Washington acquisition. “This is also our second acquisition in Virginia, and we look forward to serving our patients along with our GI partners in this growing region,  as we welcome the new practitioners to the CRH and WELL families.”

The quarterly results have prompted Newman to revise a number of key financial metrics, as he now projects WELL Health to reach $285 million in revenue for 2021, outpacing his original $270 million projection and marking a potential 468 per cent year-over-year increase over the $50.2 million in revenue reported in 2020, while Newman now forecasts $440 million in revenue for 2022 instead of $428 million, a potential 54.4 per cent year-over-year increase.

Newman’s adjusted EBITDA projections also got bumped up, with Newman now forecasting $53.9 million in adjusted EBITDA for 2021 instead of $50.9 million for the first positive adjusted EBITDA year for the company, with a slight adjustment to $97.7 million in adjusted EBITDA for 2022 instead of his initial $97.3 million projection.

Newman and Desjardins also believe the company’s EV/Revenue multiples will come down, projecting a drop from 36.3x in 2020 to 6.4x for 2021, with another forecasted dip to 4.1x in 2022.

With an approximately C$300 million credit facility and C$70.6 million in cash to pursue its 15 signed LOIs while pushing run-rate revenue to approximately C$500 million, Newman is confident in the company’s continued growth trajectory.

“We view 2Q and 3Q as an inflection point for WELL, as CRH and MyHealth significantly boost its revenue, profitability and cash flow profile,” he said. “WELL expects to drive further cost savings at CRH by tech-enabling the revenue management cycle and cross-selling its cybersecurity services to CRH’s locations.”

WELL Health’s stock price has dropped 49 cents (6.2 per cent) since January 1, reaching a high point of $9.23/share on February 24.

Disclosure: Nick Waddell owns shares in WELL Health and WELL is an annual sponsor of Cantech Letter.