New acquisition is key for Think Research, says Desjardins

Desjardins analyst David Newman continues to be a believer in Think Research Corp (Think Research Stock Quote, Chart, News TSXV:THNK), reiterating his previous “Buy” rating and target price of $5.00/share for a potential return of 132.6 per cent in an update to clients on September 13.

Founded in 2006 and headquartered in Toronto, Think Research is an integrated healthcare technology provider offering evidence-based, data-driven services and solutions to enterprise clients, hospitals, health regions, healthcare professionals and governments.

Newman’s latest updates comes after Think Research officially closed the previously-announced acquisition of BioPharma, a CRO-serving pharmaceutical, biotechnology and medical device company. Newman said the buy is a key milestone for the company as it moves into the clinical research portion of its product lifecycle.

“THNK expects to incur $500,000 to $1 million in one-time restructuring costs related to digitization and associated headcount reductions at BioPharma in 4Q21 and 1Q22,” Newman said. “It should reach $3 million in run-rate synergies six months after closing, bringing BioPharma’s EBITDA margin to approximately 20 per cent from approximately ten per cent.”

The $44.6 million acquisition consists of $20.1 million in cash funded primarily by a $14.1 million share offering, an additional $18 million in common shares, $3.3 million in deferred equity consideration due six and 12 months post-closing, and an annual earnout equal to 10 per cent of BioPharma’s EBIT through the end of 2025.

Think has been aggressive on the acquisition front since the onset of the COVID-19 pandemic, beginning with the February 2020 acquisition of Airmed Trials, a Canadian company focused on clinical trials and workflow optimization, at a cost of $877,000. They followed up by paying $13.5 million to acquire primary care clinic operator HealthCare Plus in December 2020, before adding elective surgery centre Clinic 360 ($4.9 million purchase price) and online CME and professional development solutions provider MDBriefCase ($28.6 million purchase price) in January 2021.

In addition, the company also announced a new credit agreement with the Bank of Nova Scotia to replace its current agreement with the National Bank of Canada. The new agreement consists of a $22 million credit facility, a $6 million revolving acquisition facility and a $10 million uncommitted accordion.

“We extend a warm welcome from the Think family to the talented BioPharma team,” said Sachin Aggarwal, CEO of Think Research in the company’s September 13 press release. “The closing of this acquisition offers not just immediate financial value to our shareholders, but it also represents a key pillar in our knowledge lifecycle, allowing us to utilize systems and solutions that support the clinical decision-making process, standardize care, and, ultimately, improve patient outcomes. We look forward to supporting BioPharma in its digital transformation to create synergies in the near term.”

The company also reported its second quarter financial results on August 23, headlined by revenue of $10.2 million in the quarter for a 167 per cent year-over-year increase and paired with a $1.3 million adjusted EBITDA loss compared to a $1.9 million loss in the same quarter of 2020.

Newman made minimal revisions to his financial projections, lowering his revenue estimate for 2021 to $49.7 million from his initial $50.9 million estimate, while his 2023 projection is slightly lower in the $110 million range, with his 2022 projection remaining at $94.8 million.

Newman also revised his EBITDA estimate for 2021, now projecting a $4.1 million loss compared to his initial estimate of a $3.4 million loss. However, he expects EBITDA to turn positive beginning with the final quarter of 2021 ($100,000), culminating in a positive EBITDA of $7.1 million (7.5 per cent margin) for 2022 and $12.1 million (11 per cent margin) in 2023.

From a valuation perspective, Newman’s projections paint a positive picture for the company, with the EV/Revenue multiple projected to drop from the reported 6.6x in 2020 to a projected 2.6x in 2021, then to a projected 1.4x in 2022 before falling to a projected 1.2x in 2023. Meanwhile, the EV/EBITDA multiple projections come into focus beginning in 2022 at a projected 18.2x before dropping to a projected 10.7x in 2023.

Going forward, Newman believes the company will encounter strong organic growth opportunities, which should drive a projected CAGR of 10 to 15 per cent, with a solid merger and acquisition pipeline potentially being a factor across its main sectors and key markets. Newman also points to more companies adopting healthcare technology to reduce costs and improve health outcomes as a possible catalyst for Think’s growth, while increased B2B/B2G spending could drive higher-margin private pay revenue.

Overall, Think Research’s stock price has dropped 50.6 per cent for the year to date, reaching a high point of $4.51/share on March 30.