EARNINGS UPDATE
Q1/F24: A STRONGER MARGIN PROFILE AHEAD
THE TD COWEN INSIGHT
With margins set to rebound this quarter, a robust M&A pipeline, a discount valuation, and several key near-term catalysts (potential sale of its U.S. businesses and related share buybacks/debt reduction), we believe the stock is poised to outperform. We also highlight hidden value with its HEALWELL investment, which is worth >C$130mm (~13.5% of its market cap). WELL remains our Top Pick.
Impact: NEUTRAL
Circle/Wisp sale processes in progress. Management stated that it is assessing strategic alternatives for both Circle and Wisp, which could include a sale of one or both businesses. An update on both processes is expected by year-end, with WELL looking for a fair valuation for these businesses (i.e., it is willing to hold onto them if there is a lack of suitable bids).
WELL is expecting strong, profitable growth from both Circle and Wisp this year, with the company targeting revenue of ~$100mm (~C$137mm) for Circle and ~$76mm (~C$100mm) for Wisp, with mid-single-digit Adjusted EBITDA margins. We note that our F2024 revenue forecasts for Circle/Wisp are ~10% below management's targets.
Laser focus on minimizing share dilution. Starting this year, management will be shifting away from using stock for compensation and M&A payments, including earnouts. For example, stock-based comp expense this year will be related only to prior-year issuances (i.e., no new issuances). Accordingly, share dilution is expected to be <3% this year vs. ~4% last year and 20% in F2022 (~6% dilution excluding an equity issue). Share buybacks related to the potential sale of Circle/Wisp are not included and could significantly reduce the share count.
Margins set to rebound. We believe Adjusted EBITDA margins are set to rebound in Q2/F24, with significantly stronger expansion expected in H2/F24, as WELL should increasingly benefit from its corporate-cost-optimization program and utilizing its playbook to strengthen the profitability of its Canadian clinics, particularly at the Manitoba Clinic and MCI clinics, which were all unprofitable when acquired, but are currently profitable. We also note that the margin improvement would look comparatively stronger if WELL maintained its stock-based compensation policy (we estimate ~75-100bps uplift to F2024 Adjusted EBITDA margins).
Robust M&A pipeline. The Canadian M&A pipeline includes ~40 clinics, inclusive of
~10 absorption opportunities. WELL is also looking to expand its specialized care and diagnostics footprint in Canada, with acquisition multiples in this market finally beginning to moderate to more reasonable levels.