CareRX is undervalued, Desjardins says

Desjardins analyst David Newman isn’t one to sleep on the potential of CareRx Corporation (CareRx Corporation Stock Quote, Chart, News, Analysts, Financials TSX:CRRX), maintaining a “Buy” rating and raising his target price from $9.50/share to $10/share for a projected return of 93.8 per cent in an update to clients Friday.

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 fourth quarter financial results, which came with large beats in many categories, along with finalized 2021 year-end figures.

The quarter itself was headlined by $96.9 million in revenue, which represented a beat compared to the $91.2 million projection set out by Desjardins while also presenting a 109 per cent year-over-year increase. Meanwhile, the company’s revenue per bed crossed into four figures at $1,006/bed at an average of 96,310 beds serviced, surpassing the $946/bed Desjardins estimate and improving upon the $951/bed figure set in the same quarter of 2020.

“Organic growth should be robust given homes resuming contract discussions, and substantial expansion (new construction in Ontario), transformation and consolidation in the seniors living space,” Newman said.

While the revenue results provided a beat, the company experienced some compression in its margins, as the company reported $7.6 million in adjusted EBITDA for a 7.8 per cent margin compared to the 8.8 per cent margin from the same quarter of 2020, though proper EBITDA came in at $8.7 million after normalizing for non-recurring costs, comfortably between the Desjardins estimate of $8 million and the consensus expectation of $8.9 million.

Meanwhile, gross margin was $26.2 million for the quarter to produce a percentage of 27 per cent, down from the 30.9 per cent reported in the same quarter of 2020.

With its updated results in play, the company is now targeting 130,000 beds and $500 million in revenue by 2024, and has secured contract extensions with Chartwell and Sienna on approximately 15,000 beds through the middle of the decade, with other RFPs potentially providing opportunities for CareRx to but into the approximately 329,000 beds it doesn’t presently service.

“The recent long-term contract extensions with our two largest home operator partners are further evidence of the value we provide in supporting our customers in the delivery of outstanding care to residents,” said David Murphy, President and Chief Executive Officer of CareRx in the company’s March 17 press release. “For many home operators, the pandemic has highlighted the importance of their pharmacy partnership. We have built, and continue to strengthen, a differentiated offering that we believe makes us the ideal partner for their pharmacy needs. With the accelerated expansion of the seniors living sector in the months and years ahead, we are well positioned to grow with our customers and play a significant role in improving healthcare for the most vulnerable Canadians.”

The new financial results have prompted Newman to revise some of his forward-looking financial projections, as the company’s top-line revenue of $263 million produced a year-over-year increase of 62.3 per cent. Looking ahead to 2022, Newman raised his revenue projection from $376 million to $391 million for a projected year-over-year increase of 48.7 per cent, while the 2023 projection has been raised from $403 million to $441 million, presenting year-over-year growth of 12.8 per cent.

From a valuation perspective, Newman forecasts the company’s EV/Revenue multiple to continue its descent, moving from 1.2x in 2021 to 0.8x in 2022, then to a projected 0.7x in 2023.

Meanwhile, CareRx ended the year with $22.9 million in adjusted EBITDA for an implied margin of 8.7 per cent, though Newman has raised his projection for 2022 from $40.6 million to $41.5 million for an implied margin of 10.6 per cent, followed by another jump in 2023 from $47.3 million to $51.5 million, suggesting a margin of 11.7 per cent, in line with management’s expectation of reaching a 12 per cent margin by Q4 2022.

In terms of valuation, Newman projects CareRx’s EV/adjusted EBITDA multiple to drop from 13.9x in 2021 to a projected 7.7x in 2022, then to a projected 6.2x in 2023. Newman notes the company is presently trading at 6.5x its 2023 adjusted EBITDA estimate, a discount compared to its peer group average of 11.4x.

CareRx’s share price has carefully crept upward by 1.7 per cent over the last 12 months, though the start of 2022 has produced a 4.2 per cent loss to date. After dropping to a 52-week low of $4.59/share on November 5, the stock has regained 15.3 per cent of its value, though it hasn’t reached the peak of its 52-week high of $6.84/share, which came on July 2.