WELL Health has a 361 per cent upside, says Stifel

Stifel GMP analyst Justin Keywood renewed a “Buy” rating on WELL Health Technologies (WELL Health Technologies Stock Quote, Charts, News, Analysts, Financials TSX:WELL) on Tuesday, saying recent M&A moves in the healthcare sector shine a light on the underlying value of WELL.

Vancouver-based WELL Health has a number of business segments including primary care clinics, ambulatory services in the US, virtual healthcare services in the US and Canada as well as an electronic medical records (EMR) business and other digital patient capabilities. 

The company has been growing organically and through acquisition, hitting $145.8 million in quarterly revenue for its recent Q3 2022, delivered in November and representing a 47 per cent year-over-year increase. Adjusted EBITDA was $27.5 million, also up 23 per cent, while management raised its full-year 2022 revenue guidance to over $565 million from the previous over $550 million, with expected adjusted EBITDA of over $100 million.

Keywood looked at the announced potential transaction by CVS Health in the US for Oak Street Health, with the deal pegged at over US$10 billion and representing about a 60 per cent premium to the stock’s recent close. Oak Street Health operates over 160 value-based primary care centres in the US for Medicare recipients.

Keywood also pointed to other large transactions this past year, including CVS’ purchase of Signify Health for US$8 billion, Amazon’s acquisition of ONEM for US$3.9 billion and Telus’ purchase of LifeWorks for $2.9 billion.

“The transactions are at favourable take-out premiums with a range from 3x to 9x sales and compare to WELL trading at only 1.7x and 1.4x 2022/2023 sales. We see the transactions as helping validate WELL’s business model and better valuation, despite extremely challenging market conditions,” Keywood wrote.

Offering further points, Keywood said the healthcare industry has high customer stickiness and significant network effects, where larger platforms are better able to attract more users and keep them long term. Moreover, Keywood said WELL has shown its facility with M&A, a trait which makes it all the more attractive.

“WELL has demonstrated the success of its consolidation strategy, being able to ramp up quickly, achieve profitability through scale and maintain its advantage through a highly recurring business model. This strategy is likely to garner more attention, especially by businesses that want to gain traction in the digital health space, where WELL currently holds a 20 per cent EMR market share, only behind Telus at ~45 per cent and Loblaw at ~25 per cent,” he said.

By the numbers, Keywood sees WELL as trading at 9x his 2022 EV/EBITDA estimates compared to its peers at 12x. 

“We see a takeout opportunity for certain assets of WELL’s platform, where the parts may be worth more than the whole,” Keywood wrote.

With his “Buy” rating, Keywood maintained a 12-month target of $13.50 on WELL, representing at press time a projected one-year return of 361 per cent.

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