WELL Health Technologies is a Buy, says Eight Capital

Eight Capital analyst Christian Sgro likes the new pickup by Canadian digital health company WELL Health Technologies (WELL Health Technologies Stock Quote, Charts, News, Analysts, Financials TSX:WELL). Sgro updated clients in a Tuesday report on WELL, saying the acquisition of Alberta-based INLIV could be one in a string of such tuck-ins for WELL in the Canadian market.

WELL Health Technologies, a digital healthcare company with a range of assets including an Electronic Medical Records (EMR) business, medical clinics, telehealth platforms in Canada and the US and a gastroenterology business in the US, announced on Tuesday a purchase agreement to acquire INLIV Inc, which is a healthcare provider in the Calgary area specializing in preventative health, corporate and executive health and primary care as well as cosmetics, fitness and integrated health services. 

Starting up in 1978, INLIV has over 50 people on staff including 23 care providers and clinicians and over 1,000 clients. INLIV had $7.3 million in revenue for the 12 months ended April 30, 2022, and boasts double-digit adjusted EBITDA margins, with over 85 per cent of its revenue coming from recurring membership fees.

For Vancouver-based WELL Health, INLIV is to be the company’s first foray into the province of Alberta.

“We are pleased to welcome the talented INLIV team to WELL and establish our Omni-Channel patient services network in Alberta,” said Dr. Michael Frankel, WELL’s Chief Medical Officer, in a Tuesday press release. “INLIV has an excellent track record in providing outstanding patient care. We are very excited about adding them to our network as this planned acquisition represents the continued execution of our plans to further grow our presence in the premium corporate and executive health segment. We are intent on continuing to establish our technology enabled clinical group across the country.”

The deal will see WELL pay about $1.6 million in cash, shares or a combination of the two and a 120-day general holdback amount of $240,375 also payable in cash, shares or a combination of both. WELL said the transaction is expected to close in the third quarter of this year.

For his part, Sgro called the INLIV deal a small but strategic acquisition for WELL, and the analyst estimated a transaction multiple of 2x-2.5x EV/EBITDA, assuming a ten to 15 per cent EBITDA margin.

“Today’s announcement marks WELL’s entry into Alberta, which we expect could create a beachhead for future activity in the province. Further, INLIV’s national clinical strategy across corporate and executive health businesses aligns with WELL’s goal of expanding its executive health offering across Canada,” Sgro wrote.

Sgro called the deal “slightly positive” for WELL the company and stock, saying that while it’s a small move compared to the scale of WELL’s overall consolidated platform the quality of the asset, the price and its potential implications on the M&A landscape for WELL are all notable elements.

“First, we think WELL is picking up a good quality executive health asset that carries 85 per cent recurring membership revenues. This enhances the recurring nature of the overall revenue profile and expands WELL into Alberta. Second, at an estimated 2-2.5x EBITDA, we think this is a good deal for WELL in terms of valuation. We expect this may likely have broader implications on the valuation landscape in Canada, with the potential for more attractive tuck-ins in the near term,” Sgro wrote.

On valuation and comps, Sgro sees WELL to be currently trading at 1.6x 2023 EV/revenue compared to its US digital health peers at 1.8x, while his target price is based on a 5.0x multiple of his 2023 EV/Revenue estimates. With the new update, Sgro maintained both his “Buy” rating and $12.00 target, which at the time of publication represented a projected one-year return of 278.5 per cent.

WELL announced last week it was commencing a Normal Course Issuer Bid to buy back up to 5.6 million shares, which would represent about 2.5 per cent of the current total of around 222 million. The company had a previous NCIB which expired in May, with WELL having purchased 50,000 shares following the release of its fourth quarter results on March 31, 2022.

At the same time, WELL completed in May a bought deal private placement for $34.5 million, which the company said will go towards among other things future acquisitions. 

WELL management has recently stated that it plans to ramp up its M&A program, with Founder and CEO Hamed Shahbazi saying in a May 25 press release, “Our stronger financial position comes at a time where acquisition valuations have fallen and the expected returns on capital allocation have improved. This added liquidity gives WELL the ability to aggressively pursue its goal of increasing intrinsic value on a per-share basis.”

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