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Salona Global has target lowered by Leede Jones Gable

Leede Jones Gable analyst Greg McLeish still likes the look of Salona Global Medical Device Corp (Salona Global Medical Device Stock Quote, Charts, News, Analysts, Financials TSXV:SGMD), but in a Thursday update McLeish lowered his target price on the stock. McLeish said acquisitions remain a key feature of the growth strategy for Salona, which recently completed a “transformative” acquisition in Biodex Medical Systems, according to McLeish.

Earlier this month, Salona closed on the Biodex acquisition, one which the company said will add $26 million in annual revenue with an estimated gross margin of 30 per cent.

McLeish said the plan is to enact a cross-selling strategy to increase revenues by offering Salona’s Mio-Guard athletic training market products to the large existing Biodex customer list while offering Biodex physical medicine products into its current sales channels.

“The acquisition builds upon Salona Global’s strategy to create a fully integrated global medical device company as well as adding a known global brand of devices to the company,” McLeish said.

Also early in April, Salona reported its full 2022 financials, with a change in its fiscal year from a February 28 year-end to December 31, with the result being a reduced ten-month transition period in 2022. For that, Salona reported revenue of $33.6 million, itself a 167 per cent year-over-year increase, and adjusted EBITDA at $435,000 compared to $373,000 in 2021. Salona finished the 2022 year with cash and equivalents of $1.9 million. (All figures in US dollars except where noted otherwise.)

“We continue to drive our business plan forward 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,” said executive chairman Les Cross in a press release.

With his update, McLeish adjusted his financial forecast on Salona to include the 2022 results and the completed Biodex acquisition, with the analyst now calling for 2023 revenue and EBITDA of $66.2 million and $4.0 million, respectively, and moving to 2024 revenue and EBITDA of $76.7 million and $6.8 million, respectively. 

McLeish retained a “Buy” recommendation on the stock while lowering his target price from C$2.50 to C$1.50, which at press time reflected a one-year return of 400 per cent.

“Management has extensive experience acquiring and integrating medical device companies, however successfully integrating acquisitions can be challenging. As a result, we are applying a 2.0x price/revenue multiple to value Salona Global, (this equates to a 33 per cent discount to the group multiple). To arrive at our $1.50 target price, we applied a 2x times multiple (previous 4x) to our 2024 revenue forecast,” he said.

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