First U.S. analyst launches coverage of WELL Health

Vancouver-based WELL Health Technologies (WELL Health Technologies Stock Quote, Charts, News, Analysts, Financials TSX:WELL) received its first coverage by a US analyst this week with investment bankers Maxim Group starting WELL off with a “Buy” rating and $9.00 target price. In the initiation report, Maxim analyst Allen Klee said WELL has a profitable growth outlook and an M&A strategy that could make good use of currently low valuations across the digital health technology space.

WELL Health, whose assets include medical clinics in Canada, a gastroenterology and anesthesia business in the United States and virtual health assets and digital healthcare solutions on both sides of the border, saw its share price shoot up from under $0.50 in early 2019 to $8 by late 2020. The stock briefly made it past $9 before starting to drop over the back end of 2021 and WELL has been trading in the $3-$4 range in recent months.

But Klee sees plenty of upside from here, setting a 12-month target price of $9.00 and arguing that WELL’s current trading levels reflect a relatively low valuation more typically fit for slower growth, unprofitable companies. Klee said the market does not appear to have factored in how WELL has been gaining leading market share in a number of end markets, while its businesses are profitable and with improving profitability metrics. The analyst further noted that WELL has been profitable on the organic front, posting a 21 per cent year-over-year organic growth rate with its latest quarter, and that its acquisition model has proven itself where the company has reached a $500 million revenue run rate in five years.

Klee also likes WELL’s positioning in the multi-billion dollar health tech space which aims to serve healthcare systems, clinics, physicians and nurses burdened with outdated technology and suffering from chronic staff and physician shortages. He noted that the Canadian healthcare system remains fragmented and WELL’s omni-channel approach allows for scaling and improved economics and outcomes for healthcare providers and their patients, while the company’s larger vision is to address similar needs not just in Canada and the US but globally.

“WELL’s unique strategy includes both offering technology solutions to healthcare clinics and operating its own clinics,” Klee wrote in his September 26 report. “Most of WELL’s competitors have business models that are either software-only or clinic-only. Practitioners and clinics can purchase WELL’s technology to improve their productivity and the customer experience, or they can join one of WELL’s clinics.”

“Through M&A and organic growth, WELL has built leadership positions in many of the markets in which it competes. WELL’s clinics and technology solutions allow the company to manage the entire patient and practitioner journey,” he said.

On the financial end, Klee pointed out that WELL’s topline has grown from $10.6 million in 2018 to $32.8 million in 2019 to $50.2 million in 2020 and to $302.3 million in 2021, with gross margins having improved from 33.5 per cent in 2019 to 42.2 per cent in 2020 and to 50.8 per cent in 2021. Adjusted EBITDA has gone from a small loss in 2020 to positive $50.0 million in 2021. (All figures in Canadian dollars.)

Most recently, WELL’s second quarter 2022 featured revenue up 127 per cent year-over-year to $140.3 million, with 66 per cent of revenue coming from its omni-channel businesses and 34 from its virtual healthcare businesses. Geographically, WELL’s Q2 had its US assets accounting for 57 per cent of revenue compared to Canada and other locations at 43 per cent. Adjusted EBITDA for the quarter was $26.4 million compared to $11.9 million a year earlier.

On valuation, Klee has WELL currently trading at an EV/EBITDA of 8x based on his 2023 estimates, which compares to its peer group of technology and clinic operators in Canada and the US trading at 28x.

“Our $9.00 price target is based on 22x our 2023E adjusted EBITDA and equates to a $7.00 USD price target. We believe a 22x multiple being a discount to the peer group at 28x is appropriate given the higher degree of acquisition-related risk and current debt load. Positive factors include competitive position, track record, and large total addressable market,” Klee wrote.

Up ahead, Klee said key catalysts for WELL’s share price include organic growth, potential M&A and the analyst’s view that consensus estimates are currently conservative. Klee thinks WELL’s revenue will go from $559.2 million in 2022 to $617.6 million in 2023 to $673.0 million in 2024, while on adjusted EBITDA the call is for WELL to generate $103.1 million in 2022 and moving to $118.6 million in 2023 and to $138.4 million in 2024.

At the time of publication, Klee’s $9.00 target on WELL represented a projected 12-month return of 190 per cent.

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