Salona Global has a 291 per cent upside, says Leede Jones Gable

Greg McLeish of Leede Jones Gable continues to see solid progression out of Salona Global Medical Device Corporation (Salona Global Stock Quote, Chart, News, Analysts, Financials TSXV:SGMD). In a client update on Wednesday, McLeish maintained a “Buy” rating and target price of $2.50/share for a projected return of 291 per cent.

Founded in 2013 and headquartered in Del Mar, California, Salona Global is an acquisition oriented, medical device company with a focus on the U.S. recovery market, which carries a market of US$30 billion, and aging populations. The company plans to achieve scale through further acquisitions and organic growth, with plans to develop a heavily integrated, IP driven vertical infrastructure spread across several facilities.

McLeish’s updated analysis comes after Salona Global announced a new U.S. sales subsidiary, formed in the U.S. as a Limited Liability Company (LLC) and aimed at selling medical devices and supplies to small, independent hospitals and group purchasing organization (GPO), which offers small medical offices and clinics access to devices and supplies on a larger scale.

“Selling medical devices and supplies to small, independent hospitals and group purchasing organization (GPO) is a new sales channel for Salona,” McLeigh said. “GPOs help healthcare providers – such as hospitals, nursing homes and home health agencies – achieve cost savings by aggregating purchasing volume and using that leverage to negotiate discounts with manufacturers, distributors and other vendors.”

Salona Global created the LLC in partnership with an arm’s length U.S. sales executive and his team, leveraging the executive’s deep contacts and current sales relationships in the independent hospital and GPO sales channel on an exclusive basis.

Salona is the sole owner of the LLC by contributing US$10,000 in organizational expenses; as part of the agreements to acquire the sales channel and existing customers, the Agent will receive one million Salona Global Class “A” Shares, so long as the LLC generates at least US$1 million in profitable revenue for the quarter ending February 28, 2022. 

In addition, for every US$50 in marginal profit above market transfer pricing “sales channel EBITDA” the Agent will receive $72 in Salona Global Class “A” Shares.

In addition, for a two-year period beginning February 28, 2022, the Agent will receive $72 in Salona Class “A” shares based on Salona Global’s share price on November 29 for up to US$10 million in sales channel EBITDA. Using a 25 per cent EBITDA margin, this would equate to revenue of approximately US$40 million through February 2024; the only difference between the Class “A” shares and common shares is that the Class “A” shares don’t carry voting rights, and are not listed on the TSX Venture Exchange.

“As we work to close additional acquisitions and focus on our ‎future acquisition pipeline, we are simultaneously building a fully integrated medical device ‎company with each transaction and partnership we form,” said Les Cross, ‎Chairman and interim CEO of Salona Global in the company’s November 30 press release.

“In addition to our FDA approved production facility, our European sales channel, and our cash flow generating ‎innovation team, we now add the GPO sales channel. Through this acquisition, we expect to add ‎profitable revenues to our existing annual revenue base immediately. Once we close more acquisitions, we ‎anticipate being able to increase organic revenue growth by making our products available to all of our sales channels,” Cross said.

McLeish’s financial metrics show continued growth for Salona Global, as he projects the company will reach $17.8 million in revenue in 2022, followed by a potential 152 per cent year-over-year increase to $44.7 million in 2023, with another jump to a projected $53.6 million in play for 2024. (All figures in Canadian dollars except where noted otherwise.)

The gross margin projections are also forecast to jump in that time, with McLeish projecting a boost from a 36.9 per cent margin in 2022 to a projected 38.4 per cent in 2023, with a slight increase to a 38.6 per cent margin projected for 2024.

Meanwhile, McLeish projects the company to become EBITDA positive in 2022 at $2 million and 11.2 per cent margin, with a forecasted spike to $8.5 million and a 19.1 per cent margin in 2023, followed by a projected $11 million in EBITDA with a margin of 20.4 per cent in 2024.

McLeish’s valuation data has the P/Revenue multiple coming down from a projected 2.3x in 2022 to a projected 0.9x in 2023, then dropping again to 0.8x in 2024. The EV/EBITDA multiple experiences a similar pathway, with McLeish projecting it to fall from 19.6x in 2022 to 4.6x in 2023, then to 3.6x in 2024.

Overall, Salona’s stock price has dropped by 20.3 per cent for the year to date, reaching a high point of $1.41/share on July 5, then consistently dropping since its most recent peak of $1.05/share on September 8.