Greenbrook TMS is a Buy, says Clarus

Greenbrook TMS (Greenbrook TMS Stock Quote, Charts, News, Analysts, Financials TSX:GTMS) is bulking up in the state of Florida with a new acquisition, and that bodes well for the company going forward, according to Clarus Securities analyst Noel Atkinson. Keeping a “Speculative Buy” rating on the stock, Atkinson lowered his target price in a Monday report from C$7.50 to C$4.50 per share, saying Greenbrook has a number of macro growth drivers in its favour.

Now the largest provider of Trancranial Magnetic Stimulation (TMS) therapy in the US for the treatment of Major Depressive Disorder (MDD) and other mental health disorders, Greenbrook TMS has 190 treatment centres across 21 states. The company announced on Monday the completion of the previously-announced acquisition of Success TMS, a deal for about 11.6 million shares (worth approx. C$20.6 million) which adds to Greenbrook’s stable 45 active clinics across six states. 

Success was the second-largest TMS provider in the US by number of locations and had about $30 million in revenue in 2021 with about 30 stabilized clinics. Florida becomes a key focal point with the Success acquisition, with Greenbrook now having 23 clinics in the state, while the deal also makes Greenbrook the TMS market leader in Pennsylvania and New Jersey. Concurrent with the closing of the acquisition, Greenbrook announced a $75 million secured credit facility to be used for general working capital and execution on its growth strategy. (All figures in US dollars except where noted otherwise.)

Greenbrook said the Success TMS acquisition will result in substantial SG&A cost synergies over the next year for the company, while President and CEO Bill Leonard called the acquisition plus the new credit facility transformational for the company.

“We believe these transactions accelerate Greenbrook’s ability to grow and gives us the needed capitalization to further expand on our mental health platform, through our base TMS business, expanding Spravato program, and other future treatment modalities and indications,” Leonard said in a press release.

“We are excited to begin working with Ben Klein as our new COO and our new colleagues at Success TMS who share our passion for TMS therapy and delivering exceptional patient care to those suffering from mental health disorders. We believe our business is a needed one in a time of heightened demand for mental health support,” he said.

Looking at the Success deal, Atkinson said it should result in positive adjusted EBITDA for Greenbrook by the third quarter of 2023 if the cost synergies can be realized. 

“We have significantly raised our 2022 and 2023 revenue estimates. We previously assumed GTMS would go into serious cost-cutting mode to reach positive Adj. EBITDA; the Success deal and the new term loan mean that the Company can instead focus on cost synergies and revenue growth,” Atkinson wrote.

Atkinson is now calling for Greenbrook to generate 2022 revenue and adjusted EBITDA of $76.3 million (previously $57.3 million) and negative $15.6 million (previously negative $8.8 million), respectively, and 2023 revenue and EBITDA of $103.2 million (previously $63.4 million) and $0.1 million (previously negative $4.0 million).

On valuation, Atkinson has shifted from a price/sales to EV/sales model due to the company’s more substantial debt load, putting his target price at C$4.50, which at press time represented a projected one-year return of 108.3 per cent. Atkinson said, “We believe our target multiple is reasonable given peer group valuations.”

Greenbrook’s share price was up around C$20 at its peak in early 2021 but the stock has fallen hard over the past year and a half and is currently trading around the C$2 mark.

On comps, Atkinson estimates Greenbrook TMS’ peer group of US-focused small cap mental outpatient diagnositc services peer group to be trading at an average of 1.4x 2022 EV/Sales and 1.1x 2023 EV/Sales, while Atkinson’s target multiple on Greenbrook is 1.75x 2023 EV/Sales.

Atkinson said Greenbrook had started its second quarter 2022 with solid momentum including strong new patient starts but the analyst is still conservatively assuming some COVID-related impact again in early 2023 related to illness-caused absences in patients, physicians and staff. 

Atkinson said he expects Greenbrook to be tracking towards $100 million of annualized run-rate revenues now that the Success deal has closed, with positive EBITDA around the corner.

“Greenbrook continues to have a plethora of macro growth drivers for the TMS services sector overall, which should particularly benefit the Company given that it has further distanced itself from the competition as by far the largest independent TMS treatment provider,” Atkinson wrote.

“The Spravato rollout appears to be gaining traction and should eventually have a materially positive impact on facility utilization and profitability, and we believe Greenbrook now has the largest chain of treatment clinics in the U.S. administering FDA-approved psychedelic drugs to treat depression and other mental illnesses. It has also sourced a healthy influx of working capital to help fund operations as it drives cost synergies and progresses toward the long-awaited positive Adj. EBITDA target,” he said.