Think Research keeps Buy rating with Desjardins

Desjardins analyst Jerome Dubreuil is slightly down on Think Research Corp. (Think Research Stock Quote, Chart, News TSXV:THNK), lowering his target price from $2.25/share to $1.75/share despite maintaining a “Buy” rating. The revised target price, delivered in his latest update on Tuesday, represents a potential one-year return of 150 per cent.

Toronto-based Think Research has knowledge-based SaaS solutions for the healthcare industry in Canada, the United States and internationally, including COVID-19 tools, order sets to structure clinical pathways and decision support tools.

Dubreuil’s drop comes after the company reported its first quarter financial results for the 2022 fiscal year. Despite the results being better than expected, the drop comes as a function of Dubreuil’s DCF valuation and a reduced 2023 EV/Revenue multiple of 1.25x compared to the previous estimate of 1.5x, along with a slight downshift in management’s guidance.

“THNK reported better-than-expected 1Q results with the top line progressing well despite significant (now lifted) COVID-19-related restrictions,” Dubreuil said. “However, management is now providing 4Q run-rate (rather than annual) adjusted EBITDA guidance, which we view as a negative. That said, consensus was already lower than previous guidance at $5.2 million. We believe the main reasons for the change are Omicron-related restrictions and accelerating marketing investments as management looks to capture market share.

Think Research’s quarter was headlined by revenue of $20.2 million, providing a slight beat in relation to the Desjardins estimate of $19.3 million and the consensus projection of $19.7 million. The company’s adjusted EBITDA was also a slight beat at a $0.3 million loss, just ahead of the Desjardins forecast of a $0.5 million loss and the consensus projection of a $0.4 million loss, with Dubreuil attributing the beats to the reopening of the economy in clinical research and clinics, as well as from additional synergies announced from past acquisitions.

“We are very pleased to report record revenue for the first quarter of 2022, which we achieved despite facing some program setbacks in clinical research and clinical services caused by the Omicron COVID-19 outbreak in January,” said Sachin Aggarwal, Think’s CEO in the company’s May 30 press release. “Our software and data solutions segment served as a solid offset to these unforeseen events and helped to augment our overall performance until the affected revenue streams recovered in the latter part of the quarter. Think’s results in the first quarter of 2022 prove that our diversified revenue streams afford us resilience and greater sustainability, and as a result, we believe the Company is on-track to meet our internal growth and profitability targets.”

Looking ahead, Dubreuil identified an opportunity with its MDBriefCase platform thanks to a $4.1 million agreement with a global biopharmaceutical firm which is also a client of Think’s clinical research operations, opening the door for future cross-selling opportunities and providing more optimism around MDBriefCase, which had TTM of approximately $10 million at the time of its acquisition in early 2021.

However, despite the quarterly beat on adjusted EBITDA, company management released updated guidance framing the previously announced guidance of between $7 million and $10 million as a run rate for the end of 2022 instead of being the guidance for the entire year.

Accordingly, Dubreuil lowered his 2022 adjusted EBITDA projection from $5.1 million to $4.4 million, implying a margin of 4.7 per cent. Dubreuil also made a minimal adjustment to his 2023 projection, lowering his forecast from $10.3 million to $10.1 million for a projected margin of 9.4 per cent.

From a valuation perspective, Dubreuil introduces an EV/adjusted EBITDA multiple of 17.4x in 2022, which he forecasts to drop to 7.5x in 2023.

Meanwhile, Dubreuil also made slight revisions to his revenue targets, raising his 2022 forecast from $90.4 million to $92.9 million for a potential year-over-year increase of 94.4 per cent. However, he slightly lowered his 2023 projection from $109 million to $108 million for a year-over-year increase of 16.3 per cent.

In terms of valuation, Dubreuil forecasts a halving in the company’s EV/Revenue multiple from 1.6x in 2021 to 0.8x in 2022, followed by a further drop to 0.7x in 2023.

Despite the overall target drop, Dubreuil continues to see THNK as a good investment.

“We recommend buying THNK as we view it as a unique company focused on building a digital healthcare backbone to drive medical knowledge to the point of care, reduce costs and improve outcomes,” Dubreuil said.

Think Research’s stock price has tanked to a 52.9 per cent loss this year, falling off after starting the year trading at $1.40/share and trading as low as $0.64/share on May 13.