Profitable Growth up ahead for Salona Global, says Leede Jones Gable

Greg McLeish of Leede Jones Gable sees strength in Salona Global Medical Device Corporation (Salona Global Stock Quote, Chart, News, Analysts, Financials TSXV:SGMD), initiating coverage on Thursday with a “Buy” rating and target price of $2.50/share.

Founded in 2013 and headquartered in Del Mar, California, Salona Global is an acquisition oriented, medical device company with a focus on the U.S. recovery market, which carries a market of US$30 billion, and aging populations. The company plans to achieve scale through further acquisitions and organic growth, with plans to develop a heavily integrated, IP driven vertical infrastructure spread across several facilities.

“SGMD’s acquisition oriented growth plan will leverage the liquid Canadian capital markets to target smaller US-based and international private medical device companies offering stock and cash deals to acquire, integrate and grow a large, broad-based medical device company,” McLeish said.

McLeish noted that the company’s upcoming acquisition targets have revenue ranging from $5 million to $20 million, with management having identified upwards of 30 targets and an intention to close one or two acquisitions per quarter.

In terms of company criteria, McLeish notes that Salona is looking for targets who have manufacturing facilities approved by the U.S. Food and Drug Administration, high margins and IP-protected products, and the ability to execute on the company’s domestic and international distribution strategies.

Most recently, the company completed the acquisition of IP-based operation Simbex, which generated $8 million in revenue in 2020 with 50 per cent gross margin and positive cash flow, bringing management’s expectation for Salona’s run rate revenue to $24 million.

“Simbex is promising because it develops IP and designs cutting edge medical devices in very specific, targeted markets,” said Les Cross, Chairman and interim CEO of Salona Global in the company’s September 30 press release. “A significant revenue stream for Simbex is from wearable technology, including in football helmets, deployed at all levels of play from youth to professional in the U.S. to monitor and educate players and coaches around concussion injuries. Simbex also continues to develop technology for clients not operating in our market. As Simbex generates revenue and cash flow by designing products and creating IP for its clients, it simultaneously gains the expertise applicable to specific medical device markets we intend to serve.” 

“One key aspect of this acquisition is the commercialized expertise or IP rights that Simbex retains for products in markets their clients do not address, specifically the global healthcare market for recovery medicine that we do target,” Cross added.

In addition to the Simbex acquisition, McLeish also notes that Salona is looking to acquire a company in the ergonomics and physical therapy clinic equipment business, having announced a non-binding letter of intent on July 20. The proposed acquisition fits Salona’s target profile, with $11 million in revenue in 2020 and 35 per cent gross profit margins with positive cash flow.

McLeish also expressed confidence in Salona’s board and management team headed by Les Cross, who was previously the Chairman and CEO of DJO Global, which completed an IPO for US$153 million in 2001 before being sold in 2007 for US$1.5 billion.

McLeish’s financial metrics show continued growth for Salona Global, as he projects the company will reach $17.8 million in revenue in 2022, followed by a potential 152 per cent year-over-year increase to $44.7 million in 2023, with another jump to a projected $53.6 million in play for 2024.

The gross margin projections are also forecast to jump in that time, with McLeish projecting a boost from a 36.6 per cent margin in 2022 to a projected 38.4 per cent in 2023, with a slight increase to a 38.6 per cent margin projected for 2024.

Meanwhile, McLeish projects the company to become EBITDA positive in 2022 at $1.6 million and 9.2 per cent margin, with a forecasted spike to $8.5 million and a 19.1 per cent margin in 2023, followed by a projected $11 million in EBITDA with a margin of 20.1 per cent in 2024.

McLeish’s valuation data paints a similarly positive picture, with the P/Revenue multiple coming down from a projected 3.3x in 2022 to a projected 1.3x in 2023, then dropping again to 1.1x in 2024. The EV/EBITDA multiple experiences a similar pathway, with McLeish projecting it to fall from 31.7x in 2022 to 6.1x in 2023, then to 4.7x in 2024.

Overall, Salona’s stock price has increased by 20.3 per cent for the year to date, reaching a high point of $1.41/share on July 5, roughly a month after it was initially listed on the TSX Venture Exchange, which McLeish believes to be a temporary stop-gap with management eyeing a listing on a U.S. exchange once the company completes more acquisitions. At press time, McLeish’s $2.50 target represented a projected one-year return of 169 per cent.