TD 2 WELL Health Technologies Corp.
(WELL-T) C$3.81
Q4/F23: Puzzling Sell-off; Potential Sale of Circle and/or Wisp
Event
We are updating our estimates following WELL's Q4/F23 results. See here for our
initial take.
Impact: NEUTRAL
Assessing strategic alternatives for Circle and Wisp. Management indicated that
its call option to buy out minority shareholders and IPO registration option timeline
expires in the near future for both Circle (~58% owned) and Wisp (~53% owned).
WELL has engaged with minority shareholders and management of both companies
to consider strategic alternatives that could include a sale of one or both businesses,
among other things.
Given management stated on the call that its M&A plans are focused on tuck-in
acquisitions in its Canadian clinics business, we do not believe WELL would look
to exercise its call option on either business as part of a plan to operate them over
the medium-to-long term. Assuming the challenging IPO environment continues, we
believe a potential sale of one or both assets could occur if an attractive offer was
received, which could help unlock some shareholder value.
We believe there could be solid interest in both companies, given their impressive
financial performances. In F2023, despite headwinds from the expansion of its clinic
footprint to 34 locations, Circle Medical delivered a "Rule of 40" performance, with
revenue of $97mm growing 39% organically with Adjusted EBITDA margins of 3%.
WELL believes Circle can continue to grow >30% this year, while remaining Adjusted
EBITDA positive. Meanwhile, Wisp also faced some headwinds from the retooling of
its product offering and distribution partners, but still generated revenue of $78mm,
up 34% organically, with slightly positive Adjusted EBITDA margins.
TD Investment Conclusion
We are maintaining our C$8.00 target price, based on a sum-of-the-parts
valuation. WELL's share price surprisingly dropped ~10% on heavy volume
yesterday, despite the Q4/F23 beat and in-line to better-than-expected F2024
guidance. Despite its strong execution and solid outlook, the stock is now trading
near its 52-week low. Given its solid mix of organic growth/margins, compelling clinic
roll-up opportunity in Canada, hidden value (e.g., HEALWELL investment represents
~9% of its market cap), and potential catalysts (e.g., sale of Circle and/or Wisp with
a related substantial issuer bid), WELL remains one of our top picks.