Tons of upside to Salona Global, says Leede Jones Gable

Greg McLeish of Leede Jones Gable still likes what he sees from Salona Global Medical Device Corporation (Salona Global Stock Quote, Chart, News, Analysts, Financials TSXV:SGMD), maintaining a “Buy” rating and target price of $2.50/share for a projected return of 381 per cent in an update to clients on Wednesday.

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, valued at US$30 billion, and aging populations. The company plans to achieve scale through further acquisitions and organic growth, aiming to develop a heavily integrated, IP-driven vertical infrastructure spread across several facilities.

McLeish’s updated analysis comes after the company provided updates on its operations, including the closing of a bought deal private placement valued at $4.3 million, with 7.7 million shares sold at $0.55/share and includes one common share, plus a common share purchase warrant with an exercise value of $0.70/share any time in the next 36 months. The company intends to use the net proceeds of the offering for working capital and general corporate purposes.

Salona Global also announced the acquisition of Mio-Guard LLC, a medical device sales and marketing business serving the midwest United States. Mio-Guard had 2021 unaudited annual revenues of approximately US$3.6 million with 25 per cent gross margins. Since 2009, the team at Mio-Guard has sold into the athletic training, physical therapy and orthopedics markets for sports medicine products. Mio-Guard has over 50 sales representatives in the United States with a focus on the Midwest, South and Central United States and long-standing relationships with institutions ranging from high school to college to professional athletics.

“We are excited to welcome the Mio-Guard team to the Salona Global Family,” said Les Cross, Chairman of Salona Global in the company’s February 22 press release. “With this deal we would add a group of very talented marketing and sales professionals, new customers and, of course, immediate revenues and cash flow. We continue to move toward our goal for 2022: to acquire more sales distribution businesses and build out our product portfolio, both by acquisition and internal product development.”

The Mio-Guard acquisition follows the news from November that Salona Health had launched a new U.S. sales subsidiary, ALG-Health LLC, which sells medical devices and supplies to small, independent hospitals and group purchasing organizations, the latter of which helps healthcare providers achieve cost savings by aggregating purchasing volume and using that leverage to negotiate discounts with manufacturers, distributors and other vendors.

McLeish projects solid growth for Salona in the next three years, setting a projection of $16 million in revenue in 2022 to take a significant step up from the $50,000 reported in 2021. From there, McLeish projects yet another ascent to $44.7 million in 2023 to imply year-over-year growth of 179.3 per cent, then growing to a projected $53.6 million in 2024, a year-over-year increase of 19.8 per cent.

From a valuation perspective, McLeish projects the company’s P/Revenue multiple to drop from 2.3x in 2022 to 0.8x in 2023, followed by a slight dip to 0.7x in 2024.

Meanwhile, McLeish expects the company’s EBITDA to turn positive in 2022 at $1.2 million for a 7.3 per cent margin, growing to a projected $8.5 million in 2023 for a margin of 19.1 per cent, then to a projected $11 million in 2024 for a margin of 20.5 per cent.

In terms of valuation, McLeish sees the company’s EV/EBITDA multiple dropping from 32.5x in 2022 to a projected 4.5x in 2023, then to a projected 3.5x in 2024.

The gross margin also projects upward, with McLeish forecasting gross profit of $5.2 million for a margin of 32.2 per cent in 2022, then growing to a projected $15.9 million in 2023 with a 35.6 per cent margin, before jumping to a projected $19.9 million for a 37.1 per cent margin in 2024.

According to McLeish, Salona Global has as many as 30 possible acquisition targets with limited geographical sales in its pipeline, with an intent on closing one or two deals per quarter.

“SGMD’s acquisition-oriented growth plan will leverage the liquid Canadian capital markets to target smaller US-based and international private medical device companies offering stock and cash deals to acquire, integrate and grow a large, broad-based medical device company,” McLeish said.

Salona’s stock has slid to a 19 per cent loss since it began trading on the TSX Venture Exchange in June of last year and has provided a 1.6 per cent return since the calendar turned to 2022. The stock hit its apex for the period on July 5 at $1.41/share, then dropping to a low point of $0.50/share on February 14.