WELL Health Technologies is our Top Pick, says PI Financial

It’s been a tough year so far for health tech stocks and that includes WELL Health Technologies (WELL Health Technologies Stock Quote, Charts, News, Financials TSX:WELL), which is down about 31 per cent year-to-date. But investors should get prepared for a rebound in the sector, according to PI Financial analyst Kris Thompson, who delivered on Wednesday a report on WELL Health where he reiterated a PI Financial Top Pick status for WELL in the Technology space.

Vancouver-based WELL Health has businesses in a number of verticals in the US and Canada including medical clinics, an Electronic Medical Records business, telehealth services, gastroenterology and anaesthesia facilities and a women’s health-focused platform. 

The company has been growing both organically and through acquisition, as witnessed by its most recent quarterly results which showed year-over-year revenue growth of 395 per cent to $126.5 million. The company said its organic revenue growth for the quarter was 15 per cent year-over-year, while its total patient interactions for the Q1 were at 1.1 million for an annual run rate of 4.26 million interactions. Adjusted EBITDA was $23.5 million compared to $0.5 million a year earlier.

But the general rotation in the market away from tech and growth stocks has taken its toll. Thompson said the health tech stocks in his coverage universe are currently trading at about 40 per cent of their 52-week highs.

“Multiples now seem oversold in many cases,” Thompson wrote. “WELL is trading at 38 per cent of its 52-week high, all while executing to perfection and beating consensus every quarter since Q1/20.”

“Tech and healthcare stocks remain under pressure, but when the tide turns WELL is a larger-cap, more liquid stock that should attract investors seeking health tech sub-sector exposure,” he said.

Ahead of the WELL’s second quarter financials, Thompson said he expects WELL to deliver solidly on Q2 EBITDA, calling for $23 million in EBITDA versus the consensus forecast of $22 million, with Thompson expecting $128 million in revenue compared to the consensus $129 million.

“WELL has been EBITDA positive since Q2/21, post the CRH Medical acquisition, and coinciding with the declining stock price,” Thompson said. “WELL is still a hybrid growth story via M&A and some fast growing segments including Virtual Services (especially Circle Medical and WISP in the US) where significant operating leverage is available once marketing spend is reduced (the bulk of nearly $10 million in each of the past two quarters).”

Thompson said WELL continues to target the rule of 30 — combined organic revenue growth and EBITDA of 30 per cent — and that its EBITDA now in the 20 per cent range, while the company’s organic growth of about ten per cent is a blend of lower growth but steadier clinical services (which represent 75 per cent of revenue) and higher growth virtual services (representing about 25 per cent of revenue). “A diversified basket of complementary businesses,” Thompson said.

Looking further ahead, Thompson is calling for WELL to generate full 2022 revenue and net EBITDA of $531 million and $76 million, respectively, and for 2023 revenue and EBITDA of $609 million and $97 million, respectively.

Thompson reiterated his “Buy” rating on the stock while lowering his target price from $9.00 to $7.00 per share in order to better align the target with falling sector multiples. At press time, the $7.00 target represented a projected one-year return of 124 per cent.

Thompson also said WELL’s balance sheet remains strong, with a $34.5-million equity raise in May paving the way for opportunistic M&A as the sector’s valuations remain depressed, Thompson said. Pro forma, WELL currently has about $49 million in cash, while its gastro and anaesthesia business in the US, CRH Medical, has US$160 million in debt available and Ontario-focused health services business MyHealth has about $130 million available for M&A.

“Our DCF-based target price of $7.00 (previously $9.00) equates to an EV/Sales of 3.0x (was 3.7x) on our 2023 estimates. Peer valuations continue to decline but are wide-ranging and support this multiple. Oracle acquired Cerner at 4.6x in an all-cash US$28-billion transaction,” Thompson wrote.

Last week, WELL Health announced the creation of a new business unit to consolidate its Canadian outpatient clinic businesses, one that will include WELL’s Primary Care, Allied Health and MyHealth Specialized Care businesses which together support almost 1,300 healthcare practitioners. WELL said the new Canadian Clinics Business Unit is expected to generate revenues over $160 million with double-digit operating adjusted EBITDA margins. 

“Driven by WELL’s consolidation and capital allocation efforts, this business has been experiencing organic growth rates approaching double digit percentage growth. The Canadian Clinics business unit is a key pillar in WELL’s mission to empower practitioners,” WELL Health said in a press release.

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