IA Capital - Double From Here? IA Capital Markets analyst Chelsea Stellick thinks DRI Healthcare Trust Inc. is “a rare kind of pure-play streaming company, providing an ESG-friendly, tax-advantaged income stream uncorrelated to commodity cycle.”
In a research report released Thursday, she initiated coverage of Toronto-based DRI, which focuses on acquiring global pharmaceutical royalties, with a “buy” recommendation, calling it a “healthcare name you can trust” and touting its “potentially significant upside.”
“Investors seeking diversified exposure to healthcare with a well-covered income stream at minimal risk should consider DRI Healthcare Trust,” said Ms. Stellick. “We expect strong growth in the pharmaceutical sector over the next decade and highlight DRI’s ESG advantage over royalties in the environmentally damaging mining or energy sectors. Moreover, investors avoid commodity exposure with DRI because the Trust is non-cyclical and uncorrelated to commodities. Investors should look to DRI if they want stable, reliable income (approximately 5-per-cent yield) with tempered risk.”
Ms. Stellick sees the possibility for “substantial” share price appreciation if DRI even approaches its objective to acquire $500-million of accretive royalties in the next four years.
“DRI focuses on acquiring royalties on medical products with significant life-saving potential. DRI is sheltered from the development risk of any single pipeline product due to its diversified portfolio and low cost of capital, which enables the Trust to be opportunistic in capturing products on a single asset basis,” she said. “DRI’s portfolio covers products in a wide breadth of indications at attractive risk-adjusted returns, including an oncology asset and a dermatology asset since its IPO.
“Due to DRI’s ability to access a lower cost of capital than royalty vendors who are typically subject to more development risk (biotech/pharma) or financing constraints (individuals/academic institutions), it is able to acquire royalties at a purchase price favourable to both DRI and the vendor. These acquisitions are supported by royalty income, cash raised at the IPO, and existing credit facilities that charge at LIBOR 2.0-2.5 per cent. This sustainable competitive advantage is compounded by DRI’s structure as a trust that is not subject to corporate tax, thus the Trust holds a compelling niche within the healthcare industry that makes it an optimal vehicle for acquiring and holding royalty assets.”
Mr. Stellick set a US$14 target for its units, which falls below the $15.58 consensus on the Street.
“DRI offers a rare combination of high yield and significant growth potential, with a unique combination of healthcare tailwinds at modest risk given its diversified portfolio of royalties on pharmaceutical products that generate consistent cash flow,” she concluded.