WELL Health still has huge upside, says Echelon

The stock may be down by about half over the past 12 months but Echelon Capital Markets analyst Rob Goff thinks there’s plenty of upside over the next year for WELL Health Technologies (WELL Health Technologies Stock Quote, Charts, News, Analysts, Financials TSX:WELL). Ahead of fourth quarter 2021 results from WELL, due on Thursday, Goff delivered an update to clients on Monday where he reiterated his “Buy” recommendation on the stock, saying WELL Health’s diversified businesses within the health tech space give the company a lot of tools to grow its top and bottom lines.

Vancouver-based WELL Health has businesses in digital healthcare including Electronic Medical Records and primary and specialized healthcare services with clinics and services and virtual healthcare in Canada and the US. The company issued a corporate update on March 15 related to its US operations, where WELL owns gastroenterology and anesthesia company CRH Medical, a majority ownership of digital health company WISP and a majority stake in virtual medicine company Circle Medical. 

WELL reported that CRH is continuing with its tuck-in strategy to expand its network of clinics and groups, having recently acquired Greater Connecticut Anesthesia and opened a hemorrhoid banding clinic in Chicago under the new Banding Clinic banner. On WISP and Circle Medical, WELL said the two virtual service businesses now combine for an ARR run-rate of US$70 million, with the US$100 mark expected to be reach this year and with both businesses hitting record highs in patient visits and consultations.

All told, WELL said its US business in the month of January 2022 involved over 105,000 omni-channel patient visits and over 1,100 practitioners, both single-month records for the company.

“We are extremely pleased with the performance of our US assets,” said Hamed Shahbazi, Chairman, CEO and Founder of WELL Health, in a press release. “Our operators continue to deliver high quality care to patients and exceptional financial results that create value for our shareholders. Our business has never been stronger as we continue to grow organically and inorganically in a disciplined and measured manner.”

After the business updates provided this quarter by the company, Goff said he has lifted his estimates for the fourth quarter, going from revenue, gross profit and EBITDA for the Q4 of $111.6 million, $56.8 million and $21.7 million, respectively, to now $114.0 million, $58.0 million and $23.3 million, respectively. The consensus estimates are $112.8 million, $56.1 million and $22.8 million, respectively. (All figures in Canadian dollars except where noted otherwise.)

For the full 2021 year, Goff is now calling for revenue, gross profit and EBITDA of $300.6 million, $148.3 million and $58.0 million, respectively, with the consensus coming in at $299.5 million, $146.7 million and $56.0 million, respectively. Goff’s expectations for the 2022 year are $498.3 million in revenue, $254.3 million in gross profit and $107.4 million in EBITDA. 

“We believe WELL continues to grow a diversified suite of healthcare offerings and capabilities while gaining a significant presence south of the border (over 50 per cent of total revenues),” Goff wrote. “The company’s new Rule of 30 mantra — targeting an EBITDA margin plus organic growth rate exceeding 30 per cent — highlights a measured balance between growth and profitability, where WELL finds itself in the enviable cash flow generating position to be able to manipulate that dial depending on the set of opportunities available.”

“For example, CRH Medical has been a cash flow generating machine for WELL, as it’s set to deliver ~US$43 million in free cash flow (FCF) in 2021 (recall that WELL would have begun consolidating CRH’s FCF from the acquisition close on April 23, 2021), while the company is reinvesting in Circle and Wisp’s growth, where the two assets are now exceeding US$70 million in combined run-rate annual recurring revenue (ARR), reflecting over 100 per cent organic growth year-over-year,” he said. 

“Management has indicated that it is investing heavily in marketing expenses at Circle and Wisp to continue their high-growth trajectories. Furthermore, when considering that newly added CognisantMD will join Circle and Wisp in 2022 within WELL’s burgeoning Virtual Services segment, we are left feeling very bullish on the category’s prospects and see it doing the heavy lifting to drive the Company’s organic growth,” Goff wrote.

On valuation, Goff estimated WELL to be currently trading at an EV to revenue/gross profit/EBITDA of 2.7x/5.3x/17.0x compared to US digital health peers at average multiples of 3.8x/9.1x/23.7x. And the analyst has estimated WELL as likely to have about $116 million in cash at the end of the first quarter 2022 with almost $300 million in undrawn credit from the CRH and MyHealth’s combined credit facilities.

With his maintained “Buy” rating, Goff has reiterated his 12-month target price of $13.00 for WELL, which at the time of publication represented a projected return of 181.4 per cent.

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