CareRx has more room to grow, says iA Capital

Chelsea Stellick of iA Capital Markets has her attention squarely on CareRx Corporation (CareRx Corporation Stock Quote, Chart, News, Analysts, Financials TSX:CRRX), raising her target price to $9.50/share from $8.75/share in an update to clients on Wednesday.

Headquartered in Toronto, CareRx (formerly Centric Health) is currently Canada’s largest provider of specialty pharmacy services, with over 96,000 residents in over 1,600 seniors communities, including long-term care (LTC) homes, retirement homes, assisted living facilities and group homes.

Stellick’s re-evaluation comes after CareRx reported its third quarter financial results, which Stellick noted to be a strong beat on expectations.

“As CareRx continues to consolidate the seniors home pharmacy market, we are first and foremost glad to see the company continuing to focus and execute on the core business,” Stellick said.

The company’s reporting was headlined by revenue of $71.3 million in the quarter, producing a 56 per cent year-over-year growth while coming in significantly higher than the consensus estimate of $64.6 million and the iA projection of $65.3 million. Stellick attributed the increase to the $16.5 million in revenue generated by Medical Pharmacies Group, which CareRx acquired on August 23, with a projected annual contribution of approximately $150 million in play based on the early returns, along with a contribution of between $10 and $12 million in annualized adjusted EBITDA, to go with expected additional annual cost saving synergies of $5 million.

Meanwhile, the company also reported adjusted EBITDA of $6.9 million, with EPS coming in at a loss of $0.11/share in the quarter.

“Third quarter revenue and Adjusted EBITDA were better than anticipated, driven by strong contributions from acquisitions, accelerated organic growth, and continued outstanding execution by our team,” said David Murphy, President and Chief Executive Officer of CareRx in the company’s November 9 press release. “Each of our acquisitions, including that of the Medical Pharmacies Long-Term Care Pharmacy business, are performing in line with or ahead of expectations, and integration activities are on schedule.”

“As COVID-related impacts on our sector continue to subside, we are seeing increased opportunities to acquire new customers and add new beds,” Murphy added.

With recent acquisitions of MPGL, Rexall’s senior home pharmacy business, Remedy’s Rx and SmartMeds now complete, Stellick notes that management’s indication that CareRx still has an active acquisition pipeline, and has recently gained momentum in organic growth.

CareRx secured over 3,500 new beds organically in the third quarter and onboarded 2,200 of them, putting the company just shy of 100,000 beds in its network (96,272) to pull down a 23 per cent market share, with Stellick believing the company can reach net annual bed growth of 10,000 in the future. 

The newest updates have prompted Stellick to revise some of her financial projections, elevating her 2021 revenue projection to $258.6 million from her previous $254 million estimate for a potential year-over-year increase of 59.4 per cent, though she has lowered her 2022 revenue projection to $389.9 million from $398.2 million, though the new figure still represents potential year-over-year growth of 50.8 per cent.

Similarly, Stellick has raised her adjusted EBITDA projection for 2021 to $24 million from her previous $22.2 million estimate, before slightly lowering her expectations for 2022 to $45.1 million from the previous $46.1 million forecast.

Stellick projects the company’s EV/Revenue to remain steady at 1x in 2021 before dropping to a projected 0.7x in 2022, while she forecasts drops in the EV/adjusted EBITDA multiple from the reported 21.2x in 2020 to a projected 11.3x in 2021, then dropping again to a projected 6x in 2022. With both multiples, the 2022 reduction puts CareRx either in line with, or at a discount to, its peer group in two distinct categories: Mature Pharmacies like CVS Health, McKesson and Walgreens Boots, and High Growth peers like K-Bro Linen, Medexus Pharmaceuticals, and Quipt Home Medical.

Overall, Stellick believes CareRx is more than ready to assert itself as a market leader in its space.

“Now that CRRX’s acquisition spree is complete, we look to features of the company that will enable organic growth through competitive outperformance within the industry,” she said. “Efficiencies from scale as synergies from recent acquisitions are unlocked and next year’s refinancing translates to a lower cost of capital will turn CareRx into a free cash flowing business around the end of 2022.”

Overall, CareRx’s stock price is up 66.7 per cent for the year to date, hitting a high point of $6.94/share on July 5. The stock is presently on a swift upward trajectory, having seen its value increase by 35.1 per cent since Friday alone. With her update, Stellick reiterated her “Buy” rating and at press time her new $9.50 target represented a projected one-year return of 64.1 per cent.