WELL Health Technologies is still scaling, says Stifel

There’s been a big correction in the health tech space but Stifel GMP analyst Justin Keywood remains positive on WELL Health Technologies (WELL Health Technologies Stock Quote, Chart, News, Analysts, Financials TSX:WELL), maintaining a “Buy” rating and target price of $13.50/share for a projected return of 101.5 per cent in an update to clients on November 10.

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, while also providing digital electronic medical records (EMR) software services and telehealth services, with nearly 30 clinics it operates on its own and over 2,000 clinics in Canada to which it provides software solutions.

Keywood’s latest analysis comes after WELL Health released its third quarter financial results, which Keywood said demonstrated a new level of scale despite some of the market challenges faced.

“The backdrop for WELL has been challenging with U.S. and Canadian health-tech peers correcting substantially this year by an average of 60 per cent,” Keywood said. “WELL acquired material profit through CRH and MyHealth, prior to the correction, where most peers do not have profit and leading to much better, although still challenged, share performance.”

WELL Health’s quarterly financials were headlined by $99 million in revenue, marking a 711 per cent year-over-year change and 61 per cent sequential growth, which beat the Stifel estimate of $87 million and the consensus projection of $92 million, respectively. The year-over-year growth was driven by WELL Health’s previous acquisitions of CRH Medical and MyHealth, which accounted for roughly 68 per cent of total revenue, but also by strong virtual services revenue growth.

The company reported approximately 583,000 total omnichannel patient visits during the quarter for a 139 per cent year-over-year increase, with approximately half of those visits coming in person.

Meanwhile, WELL also reported its fourth consecutive quarter of positive adjusted EBITDA at $22.3 million for a 22.5 per cent margin, which beat the Stifel estimate of $18.1 million and a 21 per cent margin, as well as being a significant improvement over the $150,000 loss reported in the same quarter of 2020.

The company’s gross margin also reported positively for WELL in the quarter, reporting at 50 per cent in the quarter compared to the Stifel estimate of 45 per cent, though the EPS came in at a loss of $0.06/share, which missed the Stifel estimate of a $0.05/share profit on account of share-based comp expenses and one-time items.

“We could not have achieved such stellar results if it wasn’t for the healthcare practitioners and clinicians that provide outstanding care every day as well as all the clinical, IT and corporate staff that support them every day,” said Hamed Shahbazi, Chairman and CEO of WELL in the company’s November 10 press release. “Our outlook is strong and resilient with 93 per cent of our revenues being recurring or highly re-occurring.  We are looking forward to delivering continued strong results in the next few quarters, with sustained organic growth from both key lines of business.”

The company’s successful quarter is in line with Keywood’s overall financial projections, as he predicts revenue to balloon from the reported $50.2 million in 2020 to a projected $291.7 million in 2021 for a potential year-over-year growth of 481 per cent, followed by another projected spike to $440 million in 2022 for potential year-over-year growth of 50.8 per cent.

Meanwhile, Keywood projects the company’s EBITDA to turn positive in 2021 at $58.5 million for a projected margin of 20.1 per cent, with another projected move to $97.1 million in 2022 for a projected margin of 22.1 per cent.

From a valuation perspective, Keywood forecasts the company’s EV/Revenue multiple to plummet from the reported 35.1x in 2020 to a projected 6x in 2021, followed by another drop to a projected 4x in 2022. Meanwhile, he projects the EV/EBITDA multiple to register for the first time in 2021 at 30.1x, then dropping to a projected 18.1x in 2022.

Keywood also expects the company’s earnings per share to turn positive in 2022 at $0.18/share, with an opening P-E multiple projection of 37.2x coming in 2022.

Overall, Keywood believes WELL Health is going in the right direction, particularly with its stated 2022 goals of achieving a rule-of-30, where a rough combination of double-digit organic growth and roughly 20 per cent adjusted EBITDA margins exceeds 30.

“We see the goal as supporting higher valuation, when coupled with additional M&A and greater cash generation,” Keywood said. “WELL’s stock has seen some recent pressure with a broader market reset in health-tech but continued profitable growth is unique and the share price should follow higher.”

Overall, WELL Health’s stock price is down 19.8 per cent for the year to date, hitting a high point of $9.23/share on February 24 before going back up and then down again, though it has since bottomed out at $6.30/share.

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