Salona Global has a 213 per cent upside, says Leede Jones Gable

Solid quarterly results have Leede Jones Gable analyst Greg McLeish staying positive about health tech company Salona Global Medical Device Corp (Salona Global Medical Device Stock Quote, Charts, News, Analysts, Financials TSXV:SGMD). McLeish provided clients with a report on Salona Global on Tuesday where he reiterated a “Buy” rating on the stock and C$2.50 target, which at press time represented a projected one-year return of 213 per cent.

San Diego-based Salona Global reported its first quarter fiscal 2023 financials on July 14, coming in with revenue of $10.0 million, good for a 152 per cent year-over-year increase, and EBITDA of $1.3 million. (All figures in US dollars except where noted otherwise.)

An acquisition-oriented company, Salona targets the recovery science market related to an aging population in the US and internationally. The company closed on the acquisition of Mio-Guard LLC during the first quarter while also acquiring a portfolio of medical device intellectual property and executing a US distribution agreement with K-Laser for its product line. As well with the quarterly results, Salona announced the promotion of Luke Faulstick to the position of Chief Executive. 

“We had an excellent quarter in terms of gross margins coming closer to our long-term target of over 40 per cent,” said Faulstick in a press release. “I do expect as we move into our next phase of growth, we might see that moderate, but I am pleased we can see top line and gross profit growth in the same quarter which means our business plan is working well.”

Looking at the Q1 numbers, McLeish said the $10.0 million topline was in-line with his forecast at $10.2 million, while gross profit of $3.6 million (for a 36.2 per cent margin) was slightly ahead of his estimate at $3.5 million. The first quarter net loss of $3.2 million or $0.06 per share was under McLeish’s forecast of a net profit of $0.1 million or $0.01 per share, with the analyst saying the earnings miss was primarily due to higher acquisition-related expenses and a higher share-based compensation expense.

McLeish said acquisitions remain a key growth driver for Salona Global.

“The company’s first four acquisitions (SDP, Simbex, ALG & Mio-Guard) are performing well. All companies are generating revenue at their pre-COVID levels and all have experienced strong organic growth post-acquisition. Additionally, in March 2022 SDP instituted price increases from 11 per cent to 27 per cent on the majority of its products,” McLeish wrote.

McLeish said Salona has amassed an extensive acquisition pipeline of small, privately-held, standalone device companies, with the company’s immediate, short-term objectives being to valuate and acquire more complementary companies to expand its distribution networks and product lines. 

More long term, McLeish said Salona is focused on three objectives: to leverage sales distribution networks to expand its distribution channels; to increase product lines by developing, in-licensing or acquiring new intellectual property protected devices which will be synergistic with the company’s identified acquisitions; and to increase profits through operational integration in an effort to reduce supply chain risks and increase margins.

More recently, Salona announced on June 7 a non-binding agreement to acquire a medical device company that designs, manufactures and sells specialty plastics for multiple markets. McLeish said the company comes with positive cash flow and about $5 million in unaudited annual revenue and gross margins of 40 per cent, with Salona agreeing to pay $6.5 million or 1.2x annual revenue for the company.

Then on June 9, Salona announced another non-binding agreement to acquire a US-based provider of medical devices and equipment for physical therapy clinics, with the acquisition target having $14 million in unaudited annual revenue and gross margins of 35 per cent. McLeish said that deal has been listed at $14 million or 1x annual revenue. 

“These potential acquisitions would build upon the strategy of creating a fully integrated global medical device company and, if completed, would continue to add cash flow as well as production expertise and capabilities to the company, enabling further organic growth as Salona Global expands its medical device product portfolio through acquisition or product development,” McLeish wrote.

McLeish has updated his forecast for Salona Global, now calling for full fiscal 2023 (year end February 28) revenue and EBITDA of $47.1 million and $7.3 million, respectively, and for fiscal 2024 revenue and EBITDA of $58.6 million and $12.2 million, respectively. McLeish expects SGMD’s EPS to go from negative $0.10 per share in fiscal 2022 to $0.00 per share in 2023 and to $0.07 per share in 2024. The analyst arrived at his C$2.50 target by applying a 4x multiple to his fiscal 2023 revenue estimate.

Salona Global’s share price is up about 23 per cent year-to-date and down 33 per cent for the past 12 months.