VitalHub has a 64 per cent upside, says Paradigm

Record quarterly results are the right prescription for health services software company VitalHub (VitalHub Stock Quote, Charts, News, Analysts, Financials TSX:VHI), according to Paradigm Capital analyst Daniel Rosenberg, who reiterated a “Buy” rating in a Monday report.

“Vitalhub is seeing strong organic growth with its patient flow software solutions. The company has announced several new contracts across the UK’s NHS, which are contributing to a growing recurring revenue base,” Rosenberg wrote.

“VHI has an attractive financial profile with double-digit organic growth, gross margins of >75 per cent and strong secular tailwinds. We expect M&A to further contribute to growth given an active pipeline and strong balance sheet. Shares trade at a discount to healthcare tech peers and we expect the valuation discount to close as the company scales,” he said.

Toronto-based Vitalhub, which has SaaS-based solutions for interoperability between front-line works and healthcare organizations, announced its first quarter financials on May 11, coming in with revenue up 34 per cent year-over-year to $12.6 million. Gross profit was 80 per cent compared to 84 per cent a year earlier and adjusted EBITDA was $2.9 million compared to $3.1 million a year ago. 

The company ended the quarter with cash on hand of $17.2 million and no debt, along with an untapped $27.0 million credit facility to support future M&A. During the Q1, Vitalhub acquired Coyote Software, VHI’s 16th acquisition since 2017.

“Positive organic growth (17 per cent) and accretive inorganic growth contributed to our 34 per cent Q1 2023 revenue increase. Strong double-digit year-over-year growth in term licences, maintenance and support, and triple digit growth in services and hardware, more than offset the year-over-year decline in perpetual licenses,” said CEO Dan Matlow in a press release.

Overall, Rosenberg said the Q1 results were generally in line with consensus expectations, with the $12.6 million topline slightly ahead of consensus at $12.1 million and the Paradigm estimate at $12.2 million. Adjusted EBITDA at $2.9 was also a pinch ahead of the Street and Paradigm, both at $2.7 million.

Drilling down, Rosenberg said Professional Services continued to grow by the triple digits year-over-year at +180 per cent and organic revenue represented 44 per cent of the total. He said the margin profile faced a tougher comp, with the Q1 2022 having had an unusual spike in perpetual license volume. Rosenberg said management has reiterated its focus on increasing profitability and cash flow in 2023 and looks to realize synergies from M&A integration.

“We continue to favour VitalHub’s debtless balance sheet, predictable SaaS revenue and strong cash flow in the healthcare space, especially given the broader market uncertainties,” Rosenberg said.

With his “Buy” rating, the analyst maintained a 12-month target of $4.50 per share, representing at press time a projected return of 64 per cent.

“VHI continues to trend positively and predictably. Given the uncertainty in the market we favour VHI’s defensive qualities and attractive valuation,” he said.