EIGHT RESEARCH $13.00 TARGET PRICE AND SOME INTERESTING INFO WELL Health Technologies Corp. (WELL-T: C$7.36) July 20, 2021 BUY Target: C$13.00
Christian Sgro, CPA, CA, CFA / (647) 253-1133 csgro@viiicapital.com Virtual marketing takeaways, looking to Q2/21 report as MyHealth acquisition closes
Eight Capital recently hosted WELL Health CEO Hamed Shahbazi for two days of virtual marketing meetings. The conversations were focused around network effects across the broadened platform as well as the recent MyHealth acquisition which closed on July 15, 2021. Overall, the conversations were positive and the company remains poised for further M&A with ample liquidity and solid FCF generation. We summarize some of the key takeaways below and offer some thoughts into the Q2/21 report in August alongside incremental items on the MyHealth acquisition.
Key takeaways: • Network effects prove out value of consolidation strategy (Figure 2). We believe network effects will help sustain above-industry organic growth rates across segments, which range in the mid-single digit to high teens across business units. The company noted its first pilot into CRH for cybersecurity services, as well as opportunities to optimize/digitize CRH's revenue cycle management. Within software offerings, the company is seeing cross-sell opportunities between the EMR and Billing & Back-office units, referring and upselling clients. An evolving ability to keep patients in-network will benefit the WELL platform as the company continues to consolidate Canadian assets. • Thoughts on M&A (Figure 3). The CRH and MyHealth business units will operate as standalone acquisition engines, with predictable target profiles across North America. Considering the core WELL platform, we expect acquisitions to land in North America although the company suggested seeing attractive valuations in Europe. We believe the company is surveying a wide range of digital health targets, including mental health, chronic care, and executive health assets among others. The company has access to over $300M of cash + credit and we calculate a Net Debt to NTM adj. EBITDA ratio of 2.2x exiting Q3/21 (considering EBITDA to Shareholders).
Q2/21 preview and MyHealth: • Q2/21 report preview (Figure 1). We expect the June quarter report in mid-August, which will include a two-month contribution from CRH. We estimate revenue of $58.3M, near the high end of consensus, with CRH contributing $29.9M. We would not be surprised to see updated revenue segmentation, with the expectation that cybersecurity may be folded into the software and services segment with CRH reported separately. Looking to the fully consolidated financials, the quarter will provide an updated view on several modelling items, including the new GM% and EBITDA% profiles, D&A and non-cash considerations, and NCI dynamics. • MyHealth closing considerations; several positive takeaways. The acquisition closed sooner than we had expected, contributing almost a full Q3/21 quarter. This suggests upside to current Q3/21 consensus estimates - we will fine-tune our model with the Q2/21 report with no impact on 2022 estimates which drive our price target. As well, the company issued 8.3M shares as opposed to the 9.6M originally communicated, based on adjustment terms in the agreement and strength in WELL shares since the announcement. Considering the $94.3M equity component and adjusted 8.3M shares issued, the effective issue price works out to ~C$11.30 making the deal more accretive for WELL shareholders.
Target Price Valuation Methodology: WELL currently trades at 3.9x 2022E EV/revenue compared to pure-play telemedicine peers at 7.8x and omnichannel service providers at 4.2x. Our target price is based on 7.0x, reflecting WELL's scale and the potential for accretive M&A while a discount to US peers at 7.9x.
WELL Health Technologies Corp. July 20, 2021
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Figure 1: Q2/21 preview
Source: Company reports, Eight Capital, FactSet
Figure 2: Network effects across expanding platform
Source: Company reports
C$ Millions Eight Cap Consensus Eight Cap Eight Cap (except per share) Estimates Estimates Q1/21A Delta Q/Q Q2/20A Delta Y/Y Patient Services 12.5 11.7 0.9 8.2 4.3 Software and Services 10.3 7.6 2.7 2.3 8.0 Cybersecurity Services 5.5 6.3 (0.8) 0.0 5.5 CRH Medical 29.9 0.0 29.9 0.0 29.9 Revenue 58.3 55.9 25.6 128% 10.6 451% Gross Profit 24.2 24.8 10.0 14.2 4.2 20.0 Gross Margin % 41.6% 44.3% 39.3% 2.3% 40.0% 1.6% Adj. EBITDA to SH 7.0 - 0.5 6.5 (0.4) 7.4 Adj. EBITDA Margin % 11.9% - 1.8% 10.1% -3.9% 15.8% IFRS EPS (0.03) (0.01) (0.04) 0.01 (0.03) 0.00
WELL Health Technologies Corp. July 20, 2021
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Figure 3: Three-pronged M&A engine, columns represent 1) core WELL platform, 2) CRH, and 3) MyHealth
Source: Company reports