Organic growth accelerating for CareRx, says Desjardins

Desjardins analyst David Newman continues to like CareRx Corporation (CareRx Corporation Stock Quote, Chart, News, Analysts, Financials TSX:CRRX), maintaining a “Buy” rating and target price of $9.50/share for a projected return of 57.8 per cent in an update to clients on Sunday.

Originally incorporated in 2001 as Centric Health Corporation and headquartered in Toronto, CareRx operates a network of pharmacy fulfilment centres that provide chronic medication and other specialty clinical pharmacy services to Canadian seniors.

Newman’s updated analysis comes after CareRx released its third quarter financial results, which came with large beats in many categories in relation to the Desjardins projections. The company’s Q3 featured revenue up 56 per cent year-over-year to $71.3 million and adjusted EBITDA up 79 per cent to $6.9 million.

“Third quarter revenue and Adjusted EBITDA were better than anticipated, driven by strong contribution from acquisitions, accelerated organic growth, and continued outstanding execution by our team,” said David Murphy, President and CEO of CareRx in the company’s November 9 press release.

“As COVID-related impacts on our sector continue to subside, we are seeing increased opportunities to acquire new customers and add new beds,”  he said. “Organic growth in the third quarter alone consisted of more than 2,200 new beds, with additional wins that have been on-boarded during the fourth quarter. This renewed momentum in organic growth, combined with a continued robust and active acquisition pipeline, makes us highly confident in our ability to continue our growth trajectory in the quarters and years ahead.”

Newman’s big takeaway from the results was the $6.9 million the company posted in adjusted EBITDA, beating the Desjardins estimate of $5.5 million and inflated by a higher-than-expected run rate contribution from Medical Pharmacies Group, which CareRx acquired on August 23, due to non-recurring cost benefits; even a normalized estimation between $5.9 million and $6.1 million would have been a solid beat on the initial projection, per Newman, with the adjusted EBITDA margin jumping to 9.6 per cent to beat the Desjardins projection of 8.1 per cent while marking a jump from the 8.7 per cent margin from the second quarter of 2020.

Newman also noted significant sequential growth of 54 per cent in the average number of beds serviced, with the 81,816 figure also representing a 66 per cent year-over-year increase. When paired with the $71.3 million in revenue the company made in the quarter, it works out to approximately $871 in revenue per bed, coming in below the Desjardins target of $936 per bed.

For the fourth quarter, Newman expects the average number of beds serviced to grow to 96,250 to generate revenue of $88.5 million and $8 million in adjusted EBITDA for a 9.1 per cent margin.

Furthering the company’s position in the industry, Newman noted a potentially significant expansion opportunity through its previous acquisition of Rexall’s senior home pharmacy business, from which it onboarded approximately 1,800 new beds in the quarter, as contracts for many of Rexall’s 6,000 remaining beds, mostly in British Columbia where CareRx already has 50 per cent market share, will expire sometime in 2022.

“CRRX still has ample white space to execute on tuck-in acquisitions, backstopped by ~C$40m in cash at the end of 3Q,” Newman said. “The company believes it has become the acquirer of choice in the Canadian institutional pharmacy landscape, noting a very robust and attractive pipeline.”

The company’s updated results have prompted Newman to revise some of his estimates, forecasting more adjusted EBITDA in 2021 ($23.3 million, previously $21 million) and 2022 ($40.6 million, previously $40.2 million), though he projects a slightly lower figure in 2023 ($47.3 million, previously $47.8 million).

In the revenue space, Newman bumped up his 2021 projection ($254 million, previously $252 million), while lowering his projections for both 2022 ($371 million, previously $375 million) and 2023 ($398 million, previously $402 million).

Meanwhile, Newman’s expectations from an earnings per share lens have gone up, as he now projects losses of $0.61/share (previously a $0.72/share loss) in 2021 and $0.06/share (previously a $0.18/share loss) in 2022 before breaking positive at $0.10/share (previously $0.05/share) in 2023.

All told, Newman points to CareRx as a top stock pick in the healthcare sector, as well as being a solid entry point for potential investors.

“We highlight CRRX as an emerging quality compounder in the institutional pharmacy sector, with multiple near-term catalysts such as reaching the 100,000-bed milestone, powered by an acceleration of organic growth; at least C$5 million in synergies from MPGL by 3Q22, followed by mega-sites; organic initiatives such as THNK’s VirtualCare, Pharmacy At Your Door and Karie device; and reaching an EBITDA margin of about 12 per cent by the end of 2022,” Newman said.

CareRx’s stock price has climbed by 58.1 per cent over the course of the year, reaching a high of $6.94/share on July 5. Notably, after being on a downward trajectory through October, the stock has rebounded with gains of 28.1 per cent since November 5.