Salona Global has a huge upside, says Beacon

Beacon Securities analyst Doug Cooper delivered an update to clients on Wednesday on Salona Global Medical Device Corp (Salona Global Stock Quote, Charts, News, Analysts, Financials TSXV:SGMD), where he nudged his target price lower while at the same time singing the praises of SGMD as a currently under-appreciated stock.

San Diego-headquartered Salona Global, a medical device company operating in the recovery science/physiotherapy market, announced its third quarter fiscal 2023 results on Tuesday for the period ended November 30, 2022. The acquisition-focused company posted year-over-year revenue growth of 211 per cent to $10.5 million and $1.3 million in adjusted EBITDA compared to $577,357 a year earlier. (All figures in Canadian dollars.)

“This quarter, just our sixth full quarter since our re-listing, also gives us the opportunity to highlight our year-over-year revenue and profit growth rate,” said Executive Chairman Les Cross in a press release. “This growth comes from our investments in five strong engines of growth: (1) M&A; (2) product development; (3) product IP acquisitions; (4) product distribution agreements; and (5) organic growth post-acquisition.”

Going over the quarterly results, Cooper said they were in-line with expectations and observed that revenue has been essentially flat for the past three quarters. At the same time, Cooper stressed that the picture is much brighter than it seems, as the flat revenue doesn’t reflect the real growth rate of the company. 

Cooper argued that SGMD is in the middle of acquiring the assets it needs to come through on its plan to be a vertically integrated manufacturer and seller of medical devices to the physio market and, further, that SGMD is currently in a transition phase where it’s moving more of its own products into production and relying less on third party products. 

At the same time, Cooper pointed readers to Salona’s order book, which hit a record $20.4 million, up 11 per cent sequentially for its fiscal third, an indication of strong demand.

Further, Cooper said that aside from its organic growth prospects, Salona’s pending acquisition of Biodex promises to be a near-term catalyst.

“Not only does the acquisition represent an increase in sales of 60 per cent+, it also dramatically expands its brand portfolio and augments its vertical integration strategy. Furthermore, given a lot of the infrastructure spend has now been done, we would expect material EBITDA margin expansion upon revenue consolidation between the two companies,” Cooper wrote.

With the update, Cooper reiterated a “Buy” rating on the stock while lowering his target price from $2.50 to $2.25 per share, representing at press time a projected one-year return of 369 per cent.

Cooper said at its current share price of $0.49 and market cap at about $40 million, SGMD is at a 1x run-rate of its EV/Sales.

“In our view, this valuation tends to be the very bottom of the valuation range and the market is not valuing the pending acquisition of Biodex. Even if SGMD were just to maintain its current 1x sales multiple AND it successfully closes Biodex, the stock should rally to $0.80 based on its new ~$70 million revenue run-rate,” he said.