Think Research is undervalued, Echelon says (April, 2022)

Echelon Capital Markets analyst Rob Goff sees a big market disconnect on Think Research Corp. (Think Research Stock Quote, Chart, News TSXV:THNK). The analyst updated clients in a Tuesday report on the company where he maintained a “Speculative Buy” rating along with a $3.40/share target price for a projected return of 282 per cent.

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 after the company announced a new credit agreement with Beedle Investments for a non-revolving term convertible loan facility of up to the principal amount of $25 million.

“We are encouraged to see a large Canadian private equity group step up and make a significant investment in Think while on favourable terms to the Company,” Goff said. “While we believe Think is quickly heading toward EBITDA-positive territory within the upcoming quarters, the $10 million advance upfront, with $15 million available for subsequent advances provides ample flexibility for the Company to execute on its strategic plan, while leaving room for tuck-in acquisitions to bolster its capabilities and growing province-wide moat.”

Under the terms of the financing, an initial $10 million advance will be provided upon closing with an interest rate of 8.5 per cent, while the remaining $15 million will be available in $3 million tranches over a four-year period with an annual standby fee of 1.25 per cent. 

According to Goff, the initial $10 million advance will be used to fund future acquisitions, organic growth investments, and general working capital purposes, while subsequent advances will be used to finance the acquisition of complementary businesses or assets by Think.

Beedle retains an option to convert the principal from the advance into stock at $1.44/share at any time, while the principal amount on any future advances can be converted at a minimum of a 25 per cent premium above the 20-day volume-weighted average price (VWAP) of Think’s shares on the trading day before any announcements around the facility.

“We are excited to have entered into this credit facility with Beedie Capital,” said Sachin Aggarwal, CEO of Think Research in the company’s April 25 press release. “We look forward to having Beedie Capital as a strategic partner supporting our momentum as we execute on our strategy to become an essential data service for clinicians everywhere in the markets we serve. The financing will provide Think with financial flexibility to continue to aggressively grow its services and solutions and to expand its footprint.”

Ahead of fourth quarter and year-end financials for 2021 being released by May 2, Goff maintains a $48 million revenue projection for 2021 for a year-over-year increase of 147.8 per cent. Looking ahead to 2022, Goff’s revenue estimate remains at $91.1 million for an implied year-over-year increase of 89.8 per cent.

From a valuation standpoint, Goff forecasts the company’s EV/Revenue multiple to drop from the reported 3.6x in 2020 to 1.5x in 2021, then to a projected 0.8x in 2022, which comes in ahead of the peer group average of 1.8x, as well as the target of 2.4x.

In terms of gross profit, Goff maintains a $23.9 million expectation for 2021 and $42.7 million for 2022, with a forecast for the company’s EV/Gross Profit multiple to drop from 5.8x in 2020 to a projected 2.9x in 2021, then to a projected 1.6x in 2022 to outpace the peer group average of 3.5x, as well as the target estimate of 5.1x.

Meanwhile, with an expected loss of $6.7 million still in play for 2021, Goff continues to forecast Think’s adjusted EBITDA to turn positive in 2022 at $6.9 million for an implied margin of 7.6 per cent. 

“Despite the challenging sector landscape, we still believe it’s prudent for investors to take advantage of Think’s current bottom-of-the-barrel valuations and prior to the Company’s EBITDA-led surge in fundamentals becomes evident within 2022,” Goff said. “We believe Think’s shares are significantly discounted at 0.8x 2022 EV/revenue and 1.6x EV/gross profit, on forecasted 2022 EBITDA margins of ~8 per cent compared to its Canadian digital healthcare peer averages of 2.0x EV/revenue and 3.6x EV/gross profit on 2022 consensu EBITDA margins of ~5 per cent (medians: 1.8x/3.5x/10 per cent).”

Think Research’s stock price has tumbled to a 32.9 per cent loss since the start of 2022, falling from a high point of $1.40/share to start the year to a recent low of $0.89/share on Monday.