NLH has 173% upside, Echelon says

Following an acquisition, Echelon Capital Markets analyst Stefan Quenneville has maintained his “Buy” rating on Nova Leap Health (Nova Leap Health Stock Quote, Chart, News, Analysts, Financials TSXV:NLH).

On April 26, NLH announced the acquisition of an unnamed health care services company in Massachusetts that posted revenue of approximately $800,000 for $300,000.

“As mentioned in my March 7 letter to shareholders, Nova Leap is in an excellent position to re-engage its acquisition program,” CEO Chris Dobbin said. “We are pleased to execute our first acquisition of 2024 in Massachusetts, a state where we currently operate several agencies and where we see significant potential for growth in the future. We’re looking forward to working with a great group of people upon closing of the acquisition.”

The analyst says this deal marks a return to the company’s previously favoured M&A strategy.

“After a several-year hiatus from acquisitions, NLH appears to be returning to its historical roots of conducting accretive M&A in the fragmented home care space,” he wrote. “The terms of the deal are consistent with Nova Leap’s M&A track record and is expected to be immediately accretive with the Company paying 0.38x Sales and 3.0x EBITDA. The deal is set to close within the first two weeks of May, with Nova Leap paying a total consideration of US$300K, including US$250K payable in cash on closing and US$50K by way of a promissory note repayable over a two-year period. Assuming the deal successfully closes within the first half of May, we estimate that the Company will have US$130K of cash and $1.1M unutilized on its revolving credit facility, with our expectation the Company will potentially make one or two additional acquisitions during the year. Meaningful accretive M&A beyond what we had initially forecasted could provide upside to our numbers and serve as a potential catalyst for the stock over both the near- and long-term.”

In a research update to clients April 26, Quenneville maintained his “Buy” rating and price target of $0.60 on NLH, implying a return of 173% at the time of publication.

The analyst thinks NLH will post Adjusted EBITDA of $2.0-million on revenue of $29.8-million in fiscal 2024.

“We are maintaining our Buy rating and price target of $0.60, implying 173% upside,” Quenneville concluded. “NLH currently trades at 8.0x our forecasted 2024E EBITDA versus peers at 11.4x and 15.7x at the high end. We value NLH based on the average of a DCF valuation (11% WACC, 3% terminal growth) and 15x 2024E EV/EBITDA multiple. We believe a higher-end multiple is warranted due to NLH’s lower-risk payor mix, faster expected growth, and the pure-play nature of its operations. Our target multiple is also consistent with M&A activity in the space, notably the ~15x 2023E EV/EBITDA announced acquisition of Amedisys (AMED-NASDAQ, NR) by UnitedHealth Group Inc. (UNH-NYSE, NR) last year.”