Nova Leap Health is a Buy, says Echelon Capital

Stellar growth prospects have Stefan Quenneville of Echelon Capital Markets jumping on board health and homecare services company Nova Leap Health (Nova Leap Stock Quote, Chart, News, Analysts, Financials TSXV:NLH), initiating coverage on Monday with a “Buy” rating and target price of C$1.00/share.

Founded in Nova Scotia in 2015, Nova Leap Health provides home and healthcare services including dementia care, companionship, personal and respite care, cooking and meal preparation, daily living, light housekeeping, transportation, medication reminders and medication administration by nursing staff. In addition to base operations in Nova Scotia, Nova Leap also has operations in Arkansas, Massachusetts, New Hampshire, Ohio, Oklahoma, Rhode Island and Vermont. 

Quenneville said Nova Leap has grown by leaps and bounds through M&A by which the company has prioritized expansion within the current areas in which it operates with a secondary objective of expanding into other new regions where an opportunity meets its pre-specified criteria.

“While the average EBITDA multiple of Nova Leap’s previous acquisitions of private companies is not a static target, we note that the Company trades at a much higher public market valuation of 11.8x 2022E EBITDA while running essentially the same operation only on a larger scale,” Quenneville said. “As such, acquisition and integration of private home care operations presents itself as a highly accretive opportunity.”

Nova Leap’s work has not gone unnoticed, as the company recently placed 42nd in the 2021 Report on Business ranking of Canada’s Top Growing Companies, with three-year growth of 1,533 per cent.

“We’re pleased to once again be recognized as one of the fastest growing companies in Canada,” said Chris Dobbin, President & CEO of Nova Leap in the company’s September 24 press release. “It’s a credit to our incredible team and a testament to the important work we do in service of our seniors and their families every day.”

The company’s most recent financial report came on August 5, headlined by $5.1 million in revenue (all report figures in US dollars, unless otherwise noted) for a 27.7 per cent year-over-year growth, as well as 1.3 per cent sequential growth despite not making any acquisitions.

In addition, Nova Leap’s U.S. operating segment qualified for the Employee Retention Credit (“ERC”) again in the second quarter of 2021, with $1.7 million in other income recognized to produce a total amount receivable for the ERC of $3.3 million, with the collection date unknown.

Meanwhile, the company reported EBITDA of $43,000, which outpaced the $38,692 EBITDA loss reported in the previous quarter, though it came in below the $159,000 EBITDA from the same quarter of 2020.

Quenneville is calling for $22.3 million in revenue for 2021 for a potential year-over-year increase of 28.9 per cent. He then projects slightly bigger jumps going forward, forecasting revenue of $33.8 million in 2022 for a potential year-over-year increase of 51.6 per cent, followed by a projected jump to $51 million in 2023, which would be a year-over-year increase of 50.9 per cent.

Quenneville also sees the company’s EBITDA and margin to improve over time, forecasting $700,000 in EBITDA and a 3.1 per cent margin in 2021, then growing to a projected $3 million and a 8.9 per cent margin in 2022, before moving to $5.1 million and a 10.2 per cent margin in 2023.

Quenneville’s valuation estimates also show Nova Leap in a positive light in comparison to its peer group, with the EV/Sales multiple projected at 1.6x for Nova Leap in 2021 compared to 2.1x for the peers, with drops to 1.1x for Nova Leap and 1.9x for the peer group in play for 2022, and further drops to 0.7x for Nova Leap and 1.6x for the peer group forecasted for 2023.

Nova Leap quickly catches up from the EV/EBITDA angle as well, with Quenneville’s first report coming in 2021 at 49.8x compared to 15.3x for the peer group. However, Nova Leap is expected to make up the difference in 2022 at a projected 11.8x compared to 14.1x for the peer group, then separating itself in 2023 with a 6.8x projected compared to a 12.4x projection for the peer group. 

Overall, Quenneville thinks Nova Leap will continue on its present path, putting itself in an even better position to grow moving forward.

“Given its comfortable net cash position and expected increase in scale, we believe Nova Leap will have room to use leverage in the coming years to expand its acquisition and integration capacity either to increase its acquisition pace or to acquire increasingly large targets,” Quenneville said.

Overall, Nova Leap’s stock price has dropped 28.7 per cent for the year to date, reaching a high point of C$0.98/share on June 22 before bottoming out at C$0.54/share on Monday. At the time of publication, Quenneville’s C$1.00 target represented a potential one-year return of 89 per cent.