More National Bank + Raymond James Executive changes at DRI Healthcare Trust on the back of a misconduct investigation have National Bank Financial analyst Zachary Evershed slashing his price target on the stock.
On Monday, DRI’s board appointed Gary Collins as interim CEO of the trust, while DRI Healthcare named Ali Hedayat as its interim CEO. The changes came following Behzad Khosrowshahi’s resignation as CEO as a result of an ongoing investigation of irregularities related to certain alleged consulting expenses presented by Mr. Khosrowshahi for reimbursement, currently said to be $7.5-million.
DRI Healthcare Trust invests in pharmaceutical royalties.
“This development likely puts a damper on future growth prospects through some mix of deal expertise lost with Mr. Khosrowshahi, reticence of royalty counterparties, and more difficult access to capital markets in the future,” Mr. Evershed said in a note to clients. “There is no denying Mr. Khosrowshahi provided a depth of expertise at the intersection of the medical industry and royalty deals, though we believe much of the day-to-day has been shouldered by CIO Navin Jacob and his team in recent quarters, and we view the appointment of Trustee Ali Hedayat as interim CEO of DRI Capital in a positive light given his strong record. That said, counterparties’ propensity to transact with the trust after the misconduct could potentially act as a limiter on future capital deployment opportunities, and we believe caution is warranted,” he said.
Following the latest news, Mr. Evershed said he is slashing his deployment assumptions within the growth portion of his net asset value estimates for the company.
His price target was cut to C$17.50 from C$23.50. “As the existing portfolio alone (and book value at about C$13/unit) supports upside from current levels (at a 19% FCF yield), we maintain our outperform rating. We hope for a substantive update to reassure investors that the trust’s growth trajectory remains feasible, at the latest when DHT reports Q2/24 results on August 6,” the analyst added.
DRI Healthcare Trust plunged 26 per cent in TSX trading on Monday to C$11.17.
Nevertheless, Raymond James analyst Rahul Sarugaser said he’s maintaining his C$24 target price for now.
“While resignation of DRI’s CEO is surprising, DRI’s deal funnel and operational team remain intact -specifically, CIO Navin Jacob, and interim CEO, Ali Hedayat, have long been embedded with DRI’s operational team and have been key engines behind the recent deal cadence - so we maintain our conviction in the long-term potential for shareholder value creation,” Mr. Sarugaser said in a note to clients.
“We do, however, expect that uncertainty around the sudden and unexpected management shuffle (with the non-zero probability of future fallout) will give investors pause in the near-term, that will likely lead to material short-term weakness in the stock price. This said, we would view this potential weakness and likely volume as an opportunity for long-term-oriented investors to add positions,” he added.
In balancing this “tension between short-term weakness and long-term opportunity,” he lowered his rating to “outperform” from “strong buy”.