Lots of upside to CareRx, according to Desjardins

Pharmacy services company CareRx Corp (CareRx Stock Quote, Charts, News, Analysts, Financials TSX:CRRX) just reported its fourth quarter 2022 financials, and the results were in-line with expectations, according to Desjardins Capital Markets analyst Gary Ho. In a Thursday report to clients, Ho reiterated a “Buy” rating on the stock but said continued labour challenges are likely to persist this year for CareRx and put a damper on the company’s goal of expanding margins.

Toronto-based CareRx, which provides pharmacy services to over 1,600 seniors facilities across Canada, announced its Q4 and full-year results on Thursday, showing revenue declining by three per cent year-over-year to $94.3 million and adjusted EBITDA down six per cent to $7.1 million. 

The company said the loss of a 5,800-bed Extendicare contract by the end of the year factored into the top and bottom line declines, with incremental costs connected to a tight labour market also factoring into the drop in earnings.

At the same time, CareRx touted a multi-year contract in Atlantic Canada to initially serve up to 600 residents and with operations expected to commence in the third quarter of this year.

“With long-term contract extensions now in place with our largest home operator partners, and our geographic expansion plans well underway, we are very well positioned to continue this robust growth trajectory as the leading pharmacy partner to the rapidly expanding seniors living sector,” said CareRx President and CEO David Murphy in a press release.

Looking at the results, Ho said the $94.3 million topline was in-line with his estimate at $94.2 million and slightly below the consensus at $94.5 million, while adjusted EBITDA at $7.1 million was in-line with his and the Street’s calls also at $7.1 million. In terms of average beds served, CareRx came in at 93,852, which was slightly above Ho’s estimate at 93,650.

As for CRRX’s balance sheet, Ho said leverage remains reasonable at about 2.3x versus 2.4x at the end of the third quarter, while the recent raise of funds through a public offering and private placement should be of further help.

On the whole, Ho described the impact of the Q4 results as mixed, saying, “While results met expectations, continued labour challenges (negative $1.5 million EBITDA impact) will persist into 2023, which limits margin expansion. Unsurprisingly, under a recession scenario (softer labour market), CRRX could stand to benefit. Patience is required.”

“On the [conference] call, we will be looking for: (1) an update on labour issues; (2) more colour into lower expected synergies from MPGL ($3.5 million versus $5.0 million initially); and (3) margin recovery expectations,” he said.

With the update, Ho reiterated a 12-month target of $4.50 on CRRX, implying at press time a projected one-year return of 90.7 per cent.