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Equity Research April 27, 2017
Please see the final pages of this document for important disclosure information.
Health Care/Specialty Pharma
CRH Medical Corp.
(CRH-T) C$8.99
Q1/17 Preliminary Review - A Modest Quarter
Lennox Gibbs
Ling Han, CFA, (Associate)
Event
CRH's Q1/17 results and commentary were highlighted by: 1) modest performance
slightly below our estimates; 2) an unfavourable payer mix change in the GAA
subsidiary; and 3) recent acquisitions of the Decatur and Kissimmee practices.
Q1/17 revenue grew 63% y/y to $22.5mm, compared with TD and Consensus
estimates of $24.4mm and $21.4mm. Overall Adj. EBITDA (inclusive of the noncontrolling
interest) was $11mm, compared with TD estimate of $12.2mm. As of
March 31, CRH had $9.2mm in cash and $48.3mm in debt. Net Debt/EBITDA was
1.1x.
Conference Call - Thursday, April 27; 11:00 am EST; Dial-in: 1-800-319-4610.
Impact: MIXED
Revenue Performance As Expected — We estimate the y/y organic growth
to be 4%-5%. Total growth was inflated by the 4 acquisitions completed since
Q1/16. We estimate the run rate from those acquisitions at approximately $32mm
(annualized). Similarly, we believe the sequential trend was affected by the
seasonal strength of the Q4/16 result. Anesthesia Services delivered $19.8mm
sales in Q1/17, which contributed 88% of total revenues. Management noted that
reimbursement rates were stable through the quarter.
Margins Moderate — CRH's overall Adj. EBITDA margin was 49% in Q1/17. This
compares to 48.9% in Q1/16 and 53% for F2016. We believe that the modest
margin was driven by 2 factors: 1) a seasonally soft quarter and 2) an unfavourable
shift in payer mix in the GAA subsidiary. The shift was driven by the annual renewal
process and is related to a single commercial payer. CRH's relatively strong
margins continue to be supported by several drivers; including high exposure to
commercial payers, high productivity clinical staffing, and strong revenue cycle
management.
Room for Growth/Expansion — We view CRH's recent track record as a positive
indication of the expansion opportunity. CRH has completed 2 acquisitions YTD -
with total annual sales of $5.4 million. We believe that CRH's deal pipeline may be
at record levels. As such, our forecasts incorporate $8mm and $15mm in acquired
revenues in 2017 and 2018. This compares with the $22.2mm CRH acquired in
2016. The opportunity is driven by strong access to capital in a highly fragmented,
uncrowded market.
Recommendation: BUY
Risk: MEDIUM
12-Month Target Price: C$12.00
12-Month Dividend (Est.): C$0.00
12-Month Total Return: 33.5%
14 14
12 12
10 10
8 8
6 6
4 4
2 2
Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17
CRH-T: Price
Company Profile
CRH Medical is a provider of anesthesia services and
Med-tech products to North American gastrointestinal
(GI) disease markets. It operates through two interrelated
business segments: (i) Anesthesia services for
GI procedures and (ii) Medical Device sales. CRH
currently provides Anesthesia services to 27 GI-centric
Ambulatory Surgical Centers (ASCs) across 7 states.
All figures in US$, unless otherwise specified
Exhibit 1. CRH — Q1/17 Results vs. Estimates
**Adj. EBITDA excludes stock based compensation, acquisition related expenses and asset impairment Charges.
Source: Company reports, TD Securities Inc.
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