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More M&A on the way for WELL Health, says Laurentian

Laurentian Bank Securities analyst Nick Agostino continues to keep a close watch on WELL Health Technologies (WELL Health Technologies Stock Quote, Chart, News, Analysts, Financials TSX:WELL), maintaining a “Buy” rating and target price of $12.50/share for a projected return of 110.8 per cent in an update to clients on Friday.

Founded in 2010 and headquartered in Vancouver, WELL Health Technologies owns and operates a portfolio of primary healthcare facilities in Canada and the United States through its network of 20 clinics (including 19 wholly-owned) in B.C. and provides OSCAR-based EMR technology to over 1,507 clinics (including MedBASE) in B.C. and Ontario, supporting over 8,000 physicians.

Agostino’s latest analysis comes after WELL Health announced it had completed an oversubscribed $70 million bought deal of convertible senior unsecured debentures.

“Post deal, we estimate WELL has about $104 million in cash available to support sales growth, M&A and fund working capital needs,” Agostino said. “Along with borrowing capacity available to CRH Medical and MyHealth, we estimate WELL now has about $385 million available in dry powder.”

The $1,000 debentures, which have a semi-annual coupon rate of 5.5 per cent per annum and a conversion price of $9.23 per WELL common share, which leads to a 3.4 per cent increase in the company’s overall share count; insiders accounted for $330,000 of the purchase. The debentures are due by the end of 2026, along with $5 million in aggregate principal of debentures issued with the over-allotment option, which was fully exercised. 

“We wish to thank the investment community and in particular the high-quality institutional investors who have supported us in this offering,” said Hamed Shahbazi, Chairman and CEO of WELL in the company’s November 25 press release. “These funds will allow us to continue to execute on our growth strategy for 2022 and beyond, and we look forward to continuing our tech enablement of healthcare practitioners.”

Though the transaction itself doesn’t have any bearing on his forward estimates, Agostino did make slight modifications to reduce profitability estimates, most notably in the adjusted EPS projections; in 2022, the projection drops from a $0.01/share profit to a $0.03/share loss, while the 2023 projection drops from $0.08/share to $0.04/share.

Agostino has kept his revenue forecast in check, as he projects a big jump to $298.1 million in 2021 for a potential year-over-year increase of 493.8 per cent over the $50.2 million reported in 2020; he also projects an increase to $471.2 million in 2022 (58.1 per cent year-over-year growth), breaking the half-billion plateau in 2023 at a projected $504 million, a projected seven per cent year-over-year increase.

In step with the projected revenue jumps, Agostino forecasts the company’s EV/Sales multiple to drop from the reported 31.2x in 2020 to a projected 5.3x in 2021, then to a projected 3.3x in 2022.

Meanwhile, after the company reported losses of $1.7 million in 2019 and $700,000 in 2020, Agostino projects the company’s EBITDA to take a significant positive turn at $55.8 million in 2021, good for a margin of 18.7 per cent. Agostino expects the margin to continue growing into 2022 at 20.6 per cent ($97.2 million), then jumping to a projected 23.5 per cent ($118.3 million) in 2023.

In accordance with EBITDA turning positive, Agostino provides his first EV/EBITDA projection for 2021 at 28.1x, forecasted to fall to 16.1x in 2022.

Agostino noted that the company trades at a discount compared to high-growth Medical Technology companies, with its 3.3x NTM EV/Sales multiple coming in below the 4.3x average of the peer group despite a better growth and EBITDA margin profile.

Agostino also believes the capital raise could be a sign of future acquisitions, with an emphasis on behavioral, mental health and gender-based assets, alongside technology-enhancing platforms; the company had a pipeline of 15 signed and pending LOI’s for tuck-in digital and clinical assets, the largest of which being WISP, which WELL acquired in September and added $40 million in ARR.

“Even when considering WELL uses earn-outs as part of its capital strategy, we believe the remaining deal pipeline includes many smaller transactions,” Agostino said. “However, while no direct use of capital has been communicated on the recent bought deal, we believe the addition of $70 million of cash to WELL’s corporate pool is a signal of a growing M&A pipeline and possibly some larger transactions along the lines of WISP.”

Overall, WELL Health’s stock price is down 24.2 per cent for the year to date, hitting a high point of $9.23/share on February 24 before going back and forth for the majority of the year, bottoming out at $5.81/share on November 23.

Disclosure: Nick Waddell and Jayson MacLean own shares in WELL Health Technologies and WELL is an annual sponsor of Cantech Letter.

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Geordie Carragher is a staff writer for Cantech Letter
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