Think Research stock is trading at a big discount, says Echelon

Echelon Capital Markets analyst Rob Goff is still contemplating his views on Think Research Corp. (Think Research Stock Quote, Chart, News TSXV:THNK), maintaining a “Speculative Buy” rating for the company, but lowering his target price from $4/share to $3.40/share to produce a projected return of 217.8 per cent in an update to clients on Tuesday.

Headquartered in Toronto, Think Research has knowledge-based SaaS solutions for the global healthcare industry. The company’s product line includes COVID-19 tools, Progress Notes to help clinical workers keep documentation standardized, eReferrals to help doctors make referrals within its system, VirtualCare to replace in-person appointments when needed, eForms to track resident volumes, signature adherence and compliance and decision support tools for seniors living in long-term care and retirement homes.

Goff’s latest analysis comes as an update to reflect the ongoing impacts of the Omicron wave of the COVID-19 pandemic, particularly in the final quarter of 2021 and the opening quarter of the 2022 fiscal year.

“While those impacts and risks have since alleviated considerably as most pockets of the provincial economy  have reopened, Think’s business lines that are more sensitive to physical distancing and closures, such as Clinic 360 and BioPharma, were negatively impacted toward the end of 2021 and beginning of 2022,” Goff said.

Goff pointed to elective surgeries being paused in Ontario as having an adverse effect on the Clinic 360 subsididary, while recommendations around social distancing would similarly delay certain clinical trials at BioPharma into future months.

However, Goff believes the company’s efforts at cutting costs will produce results when the Q4 2021 results are released, as acquisition-related synergies are set to remove approximately $5.8 million in annual costs to slice Think Research’s sequential EBITDA margin from -33.7 per cent to -2.2 per cent, accompanied by minimal drain.

In the short term, Goff expects a slightly weaker sequential result in Q122 relative to Q421, given the longer duration of restrictions within the period, with updated 2022 quarterly forecasts following the release of an earnings report in March.

Most recently, the company was selected by the Children and Youth Mental Health Lead Agency Consortium (LAC), which covers 33 service areas in Ontario, to provide a new platform intended to improve access to mental health services for children, youth and their families across the province.

“There is an unprecedented demand for mental health services for children, youth and families across the province, whose demand most often exceeds local capacity to provide care,” said Sachin Aggarwal, CEO of Think Research in the company’s February 8 press release. “We are proud our solution has been selected by the LAC to improve access to crucial mental health services as the well-being of children and their families is paramount — especially throughout the pandemic.”

Goff’s primary financial revisions come in his 2021 projections, as he lowered the revenue target from $49 million to $48 million, though the new figure still implies a year-over-year increase of 147.4 per cent. Meanwhile, Goff maintains an implied gross margin just south of 50 per cent, though the gross profit projection dropped from $24.3 million to $23.9 million, while he now has the adjusted EBITDA loss for 2021 set at $6.7 million instead of $6.6 million.

However, Goff expects a turnaround in 2022, projecting $91.1 million in revenue for an implied year-over-year increase of 89.8 per cent, with gross profit projected at $42.7 million. The biggest change is Goff’s expectation for adjusted EBITDA to turn positive at $6.9 million, representing an implied margin of 7.6 per cent.

Goff continues to view the company in a positive light from a valuation standpoint, as his EV/Revenue multiple projections of 1.7x in 2021 and 0.9x in 2022 come in ahead of both the peer group averages (2.4x in 2021, 2.2x in 2022) and the target projections (4.5x in 2021, 2.4x in 2022).

Goff’s EV/gross profit multiple follows a similar script, with the projections of 3.4x in 2021 and 1.9x in 2022 coming in at a discount to the peer group averages (5.5x in 2021, 4x in 2022) and the target projections (9x in 2021, 5.1x in 2022).

Despite the present target drop, Goff believes Think Research is working itself into a better position to move into positive territory in 2022 and beyond.

“We believe Think is establishing a foundational platform and growing moat surrounding its digital connectivity network and capabilities in Ontario, while raising the Company’s national profile for adjacent opportunities across Canada,” Goff said.

Think Research’s stock price has tumbled by 67.6 per cent over the last 12 months, accentuated by a 26.4 per cent loss since the start of 2022. The stock is a long way off its 52-week high of $4.51/share from March 30, closing Tuesday at a 52-week low of $1.03/share on the TSX Venture Exchange.