CareRx is still a Buy, says iA Capital

Chelsea Stellick of iA Capital Markets is applying a bit more caution to CareRx Corporation (CareRx Corporation Stock Quote, Chart, News, Analysts, Financials TSX:CRRX), maintaining a “Buy” rating but reducing her target price from $10/share to $8/share for a projected one-year return of 66.7 per cent in an update to clients on Thursday.

Toronto-based CareRx is Canada’s largest provider of specialty pharmacy services, with over 52,000 residents in over 900 seniors communities (representing a 12-per-cent market share by number of beds), including long-term care (LTC) homes, retirement homes, assisted living facilities and group homes in Ontario, Alberta, British Columbia and Saskatchewan.

Stellick’s updated analysis comes after the company released its first quarter financial results for the 2022 fiscal year after market close on Wednesday, which Stellick labelled as a setback despite reporting revenue of $93.2 million for a 108 per cent year-over-year increase while being in line with the $92.4 million estimate set out by both iA Capital Markets and the consensus.

Meanwhile, the company reported adjusted EBITDA of $8.6 million for a year-over-year increase of 11 per cent and an implied margin of 9.2 per cent, while being in line with the $8.8 million consensus estimate and the $9.1 million projection set out by iA Capital Markets.

The setback came from organic contraction, with the company set to lose 5,800 of its beds in the second half of 2022 after one of its large customers awarded an RFP to one of CareRx’s competitors, with Stellick estimating an annual revenue loss of between $20 million and $25 million.

“Although Q1/22 was in line with our expectations and consensus, the loss of 5.8K beds to a competitor does set back the plan to service more than 100K beds to the original timeline of completion in 2023,” Stellick said. “Although no longer ahead of schedule, we nonetheless see the execution of more than 100 per cent YoY growth and opportunistic upgrading of the fulfillment network in tandem with the MPGL integration as evidence of strong management.”

CareRx was also hurt by drug pricing adjustments effective April 29, which lowered generic medication pricing from about 18 per cent to approximately 15 per cent of reference branded drug prices which will negatively impact adjusted EBITDA by approximately $0.5 million in 2022. 

In regards to generic drug pricing, negotiations will be conducted by the pan-Canadian Pharmaceutical Alliance (pCPA) and the Canadian Generic Pharmaceutical Association (CGPA) in 2023, which will impact CRRX margins through the dollar amount of drug markups earned by CareRx.

One positive for the company going forward is that it will be the first Canadian company to use the BD Rowa Dose, which Stellick believes will enhance operating margins by reducing labour costs, errors, and waste at a new fulfillment centre in Oakville, Ont.

“The first quarter of 2022 once again saw strong year-over-year revenue and Adjusted EBITDA growth, driven by both acquisitions and organic growth, and by continued outstanding execution by our team,” said David Murphy, President and Chief Executive Officer of CareRx in the company’s May 12 press release. “We delivered a solid start to 2022, despite average bed count for the quarter being slightly dampened by the impact of the Omicron variant. Importantly, during the quarter we continued to execute in areas that will support our growth in the near- and long-terms.”

The results and news have prompted Stellick to revise her financial projections, lowering her 2022 revenue estimate from $390 million to $377.1 million for a potential year-over-year increase of 43.6 per cent. Looking ahead to 2023, Stellick again lowered her revenue target from $431.8 million to $408.3 million for a potential year-over-year increase of 8.3 per cent.

Looking at valuation, Stellick forecasts a drop in the EV/Revenue multiple from 1x in 2021 to a projected 0.7x in 2022, remaining there for 2023.

Stellick also reduced her adjusted EBITDA estimates, shifting her 2022 forecast from $42 million to $37.1 million while raising her 2023 target from $46.4 million to $47.1 million.

In terms of valuation, Stellick forecasts the company’s EV/adjusted EBITDA multiple to drop from 11.8x in 2021 to 7.3x in 2022, then to a projected 5.7x in 2023.

“The sector is clearly consolidating which paints a positive picture for future organic growth, and although we see less rapid operating margin improvement than previously forecasted, we do continue to believe CareRx will improve margins once integrations and efficiencies of scale accrue fully to the bottom line next year,” Stellick said. “With plenty of opportunities to make up for lost revenue through organic and acquisitive growth, we remain bullish on the name and confident in the long-term outlook.”

CareRx’s stock price has fallen by 15.6 per cent since the start of 2022, unable to sustain momentum after hitting an early peak of $5.58/share on January 20. Today alone, the share price has fallen by 10.9 per cent, dropping to a 2022 low of $4.66/share.