Take a pass on Think Research, says Desjardins

Desjardins Capital Markets analyst Jerome Dubreuil is having second thoughts about Think Research Corporation (Think Research Stock Quote, Charts, News, Analysts, Financials TSXV:THNK) after a new financing was recently announced. Dubreuil moved his rating from “Buy” to “Hold” in a Tuesday report to clients, saying Think’s long-term prospects are still good but a number of factors are at play to make the company’s shorter-term picture less promising.

Toronto-based Think Research has digital health software solutions to support the clinical decision-making process, standardize care and help support better healthcare outcomes. At present, over 13,000 facilities and over 300,000 healthcare professional are using Think’s solutions. 

The company announced on Monday that it has drawn a second advance from its convertible facility and also announced a non-brokered equity financing, both for $3 million. The two financings will be used for general working capital purposes and to pay down a portion of the term loan under its existing credit agreement with the Bank of Nova Scotia.

In the same announcement, Think gave an update on its business, saying the company is gaining sales momentum over the fourth quarter and is experienced a “robust” backlog of contracted revenue, pegging Q4’s annualized revenue run rate at between $84 and $90 million, or $21 to $22.5 million in revenue for the fourth quarter. On earnings, management said the Q4 should come in with $1.5-$2.3 million in adjusted EBITDA.

“With greater visibility to growth in revenue and EBITDA into 2023, supported by a remarkable backlog of work, we believe Think is well positioned to prudently execute on our strategy, while continuing to prioritize cost synergies and disciplined growth,” said Think Research CEO Sachin Aggarwal in a press release. “We greatly appreciate the continued support of all shareholders as we carve our path forward.”

For his part, Dubreuil said the new financing gives some breathing room to Think and its operations but also carries with it some challenges. He said it’s encouraging to see investors supporting Think’s business plan but that the financing will be dilutive to the tune of about 13 per cent for the equity financing alone if completed. On the positive side, Dubreuil said management’s Q4 guidance is aligned with the consensus call on revenue (the Street’s estimate is $21.4 million) but higher on EBITDA ($0.9 million from consensus). 

With the lowered rating, Dubreuil also decreased his target price from $1.00 to $0.55 per share, representing at press time a projected one-year return of 41 per cent.

“We are moving to a Hold rating (from Buy) on THNK given the dilution from its most recent financing and the possibility of additional funding requirements. We continue to see solid tailwinds over the long term for the company, but the recent covenant situation (which has not been fully addressed), our reduced estimates and the significant integration work remaining have us moving to the sidelines for now,” Dubreuil wrote.