Continued M&A from Nova Leap Health, says Echelon

Stefan Quenneville of Echelon Capital Markets likes what he’s seeing out of Nova Leap Health (Nova Leap Stock Quote, Chart, News, Analysts, Financials TSXV:NLH), maintaining a “Buy” rating and raising his target price to C$1.10/share from C$1.00/share for a projected return of 80 per cent in an update to clients on Friday.

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.

After having just initiated coverage on the company last month, Quenneville’s updated analysis comes after Nova Leap completed its largest acquisition to date. Valued at $4.75 million (all report figures in US dollars except where noted otherwise), is of an undisclosed home care services company with operations in the Southern and Midwestern regions of the United States, which Quenneville noted should be immediately accretive.

The deal includes $4.4 million payable in cash and a $350,000 promissory note repayable over two years, with the new company generating unaudited annualized revenue of $4.1 million and EBITDA of $825,000 for 2021.

“This acquisition marks the company’s first foray into the US Midwest while also expanding its footprint in the Southern region following other recently announced acquisitions,” Quenneville said. “With ample M&A opportunities in the fragmented non-medical home care market, we would not be surprised to see the company continue to build its regional scale in locations in which it already has a foothold.”

“With the pace of M&A likely to continue given the attractive demographic trends and fragmented nature of the home care industry, we highlight that, assuming the successful closing of recently announced acquisitions, any further M&A will likely result in upward revisions to our estimates,” Quenneville noted.

The operation is Nova Leap’s third acquisition in the last two weeks, which Quenneville noted to represent approximate acquired revenue of $9.6 million. The deal is also in line with the company’s acquisition history, as Nova Leap’s payment represents 1.16x Sales and 5.76x EBITDA.

“We are pleased to further our expansion with this business,” said Chris Dobbin, President and CEO of Nova Leap in the company’s November 11 press release. “We’re looking forward to working with a great group of people upon closing of the acquisition.”

Quenneville projects modest moves for Nova Leap over the next few years, projecting $21.7 million in revenue for 2021 for a potential year-over-year increase of 25.4 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 55.8 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 projects the company’s EBITDA and margin to improve over time, forecasting $300,000 in EBITDA and a 1.4 per cent margin in 2021, then growing to a projected $2.8 million and a 8.3 per cent margin in 2022, before moving to a projected $4.7 million and 9.2 per cent margin in 2023.

Quenneville’s valuation projections also acquit Nova Leap well in comparison to its peer group, with the EV/Sales multiple projected at 2x for Nova Leap in 2021 compared to 2.3x for the peers, with drops to 1.3x for Nova Leap and 2.1x for the peer group in play for 2022, and further drops to 0.9x for Nova Leap and 1.9x for the peer group forecasted for 2023.

Nova Leap quickly catches up from the EV/EBITDA projection angle as well, with Quenneville’s first report coming in 2021 at 160x compared to 18.2x for the peer group. However, Nova Leap projects to immediately make up the difference in 2022 at a projected 15.7x compared to 16.6x for the peer group, then separating itself in 2023 with a 9.2x projected compared to a 14.6x projection for the peer group. 

“We now value NLH based on the average of a DCF valuation (11 per cent WACC, three per cent terminal growth) and a 16x 2023E EV/EBITDA multiple (up from 14x) with the belief that an above-average multiple is warranted due to the company’s meaningfully faster expected growth, lower risk payor mix, and the pure-play nature of its operations,” he said.

Nova Leap’s stock price has dropped 25.3 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 October 25.