CareRx is undervalued, says Desjardins

Desjardins Capital Markets has resumed coverage on Canadian pharmacy services company CareRx Corp (CareRx Stock Quote, Charts, News, Analysts, Financials TSX:CRRX), with analyst Gary Ho asserting a “Buy” rating in a Wednesday report.

Toronto-based CareRx has a network of pharmacy fulfillment centres across Canada and provides pharmacy services to seniors living communities such as long-term care homes, retirement homes, assisted living facilities and group homes. The company currently serves over 93,000 residents in over 1,600 communities.

CareRx announced on Wednesday the completion of a $16.1-million equity offering at $2.70 per share, with $12 million closed on Wednesday and another $4 million expected to close by the end of February. The deal includes about $8 million through a concurrent private placement with Yorkville Asset Management. Pro forma, Yorkville will altogether own 16.5 million shares, representing about a 27 per cent ownership position. CareRx said the proceeds of the deal will go towards paying down debt and for working capital purposes.

Looking at the announcement, Ho gave it a “mixed/neutral” rating, saying management is being cautious in the event of deteriorating market conditions, factoring in debt covenants and convertible debentures set to mature in March 2024.

“While the equity offering provides added financial flexibility and we are encouraged to see Yorkville’s continued support for the CRRX story, the offer price of C$2.70/share equates to a valuation of ~6.5x our 2023E EBITDA (and a 12 per cent discount to CRRX’s January 11 close) and the C$16 million offering represented ~10 per cent of CRRX’s market cap,” Ho wrote.

“We updated our model for the equity financing. Although the increased share count was dilutive to our target price, this was offset by rolling our valuation one quarter forward. Pro forma, CRRX has 53.5 million shares outstanding,” he said.

Looking ahead, Ho has forecasted CareRx to deliver a full 2022 topline of $382 million compared to the $263 million generated in 2021. From there, he is calling for 2023 revenue of $391 million and 2022 revenue at $424 million. On earnings, Ho is forecasting CRRX to go from $22.9 million in adjusted EBITDA in 2021 to $32.2 million in 2022 and then onto $34.0 million in 2023 and $42.6 million in 2024. 

For CareRx’s upcoming fourth quarter 2022, Ho has estimated $94.2 million in revenue and adjusted EBITDA at $7.1 million.

Ho has paired his “Buy” rating with a 12-month target of $5.00 per share, which at press time represented a projected return of 89.4 per cent.

“We reiterate our Buy rating. At 6.4x 2023 EBITDA vs 6.8‒10.8x historically, CRRX is attractively undervalued,” he said.