WELL Health Technologies is poised for a bounce, says Echelon

Solid preliminary second quarter results have arrived from WELL Health Technologies (WELL Health Technologies Stock Quote, Charts, News, Analysts, Financials TSX:WELL), according to Echelon Capital Markets analyst Rob Goff, who delivered a report to clients on WELL on Friday, saying WELL and the Canadian digital health sector could be due for a bounceback.

WELL Health, an omni-channel digital health company with businesses including among others medical clinics, Electronic Medical Records, telehealth and virtual medicine and gastroenterology, announced an update on Thursday where it said its preliminary second quarter revenue is expected to exceed $130 million and adjusted EBITDA to land above $23 million, with shareholder free cash flow of about $15 million.

The company said patient visits across its assets grew by 50 per cent year-over-year to 839,698, which would be good for a seven per cent sequential increase as well. Combining its omni-channel patient visits with Ontario-based MyHealth’s diagnostic visits and US women’s medicine-focused Wisp’s asynchronous patient consultations and you get 1,172,849 patient interactions for the quarter.

WELL added that its US-based virtual patient services businesses in Circle Medical and Wisp are showing strong growth, with their combined revenue run rate above $115 million at the month of June and positive adjusted EBITDA. Also, WELL’s wholly-owned US-focused gastroenterology and anaesthesia CRH Medical had a record quarter for cases across its 93 medical facilities, WELL said.

“Our patient visit figures have historically been an excellent leading indicator of our overall operational and financial performance. To that end, we’re very pleased to report another record quarter of patient visits delivered by our more than 2,200 healthcare provider partners systemwide,” said Hamed Shahbazi, Chairman and CEO, in a press release.

“WELL’s business model of ‘caring for the care providers’ by supporting them in all aspects of running their operations and allow them to focus on providing care is working. Now more than ever, at a time when healthcare workers are under duress, WELL is applying all of its talents and resources to help them focus on what matters, providing the best patient care available and delivering optimal health outcomes. We look forward to reporting Q2 results,” Shahbazi said.

Looking at the preliminary numbers, Goff said the $130 million in revenue and $23 million in EBITDA would compare with his forecast of $129.9 million and $22.4 million, respectively, and the consensus figures at $129.4 million and $23.0 million. Goff noted that the projected annualized run-rate for Circle Medical and Wisp at $115 million for June would be higher than what the pair had achieved in May at $110 million and March at $100 million, which demonstrates a robust growth trajectory, according to Goff.

“We continue to be encouraged by the success of WELL’s US growth assets Circle and Wisp, especially at a time when US bellwether Teledoc has been challenged by competitive pressures within its direct-to-consumer (DTC) telehealth segment early in 2022,” Goff wrote.

“Those challenges led to Teledoc slashing its 2022 revenues/EBITDA guidance with the Q122 release; meanwhile, Circle and Wisp continue to accelerate and have generated positive EBITDA for several months now despite WELL’s focused marketing reinvestment into the growth assets, prioritizing scale over profitability,” he said.

Despite judging the preliminary figures a positive for the company, Goff nevertheless lowered his target price on the stock, citing a higher cost of capital within his discounted cash flow valuations which in turn is due to ongoing sector retrenchment. With the update, Goff reiterated his “Speculative Buy” rating on WELL with a new $8.00 target (previously $11.00), which at the time of his report’s publication represented a projected one-year return of 133.2 per cent.

“WELL remains a relatively conservative vehicle for exposure to the secular growth of health technology and care. The Company’s 2022/23 EV/EBITDA at 14.9x/12.6x offer a measure of support while Canadian sector sentiment remains negative,” Goff said.

Goff noted that WELL Health’s US peers in the digital health space have experienced a significant bounce over the past month, where their median return was 24 per cent against the S&P 500 and Russell 2000 Indices at five per cent and ten per cent, respectively. On the Canadian front, that bounce has yet to happen, Goff said, as the Canadian digital health peer group is up just two per cent over that time, leaving valuations at near three-year historical lows.

“We’ve long held the position that US bellwether names would likely lead the digital health turnaround, with WELL Health, i.e. the Canadian bellwether, not far behind. We’ve now seen the US peers participate in a significant bounce against the broader equities market over the past month and we could see investors begin to shift attention toward the beaten-down Canadian market, deploying capital in companies with leading fundamentals and balance sheets (WELL Health),” Goff wrote.

“We would also point out that WELL Health likely resembles the US peer group the closest of the Canadian names, where it holds an EV of $1.0B against the median US EV of US$1.2 billion, while generating ~55 per cent+ of its revenues in the US. We expect the current US valuation premium of 189 per cent to regress back toward the 75 per cent historical average with time, which would imply a 60 per cent+ bounce in Canadian digital health shares from here,” he said.

Goff added that recent heightened M&A activity in the digital health space (Amazon and One Medical, TELUS and LifeWorks, for example) could be a signal of a potential bottoming out or turnaround for the sector, with Canadian names like WELL sure to participate at some point, Goff said.

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