Desjardins Believing the “pendulum swung back too hard,” Desjardins Securities analyst Jerome Dubreuil is “generally bullish” on the Canadian healthcare technology sector, citing low valuations and “strong” long-term fundamentals.
“With healthcare tech stock prices feeling the COVID-19 hangover but revenues still cruising along a massive growth runway, we believe sector valuations are too cheap vs non-healthcare SaaS-based companies, even when considering profitability,” he said in a research note. “With the opportunity to help the healthcare sector catch up to other industries from a digitization standpoint, we view healthcare tech as a much bigger story than telemedicine. We note that there has been a dislocation recently in the correlation between the number of active COVID-19 cases and sector valuations. While this is bad news for shareholders in the near term given the growing number of active cases, we believe this development is generally positive in the context of the reopening of the economy.”
“We believe the sector was hit by the renewed focus on profitability along with rising interest rates. However, we believe the elevated gross margins, combined with significant operational leverage and rapid growth, should alleviate some of these concerns. Moreover, the fear of a looming recession resulting from high inflation could position the sector well given the healthcare industry is relatively resilient, especially in Canada. Our top two picks in the sector (LSPK and CARE) are not exposed to clinics and have little to no exposure to B2C and transactional services, all of which may be more affected by the economic backdrop.”
His ratings and targets are:
Well Health Technologies Corp. with a “hold” rating and $7 target. Average: $9.92.
“After completing 10 acquisitions in 2020 and 23 in 2021, WELL appears to be transitioning to a strategy that involves less M&A (albeit still some) but more integration of the existing portfolio,” he said. “In our view, this strategy tilt is consistent with the valuation gap between private and publicly traded healthcare companies, and with the integration potential we see for WELL’s assets. Nonetheless, we believe that M&A remains an important part of the company’s strategy, possibly continuing the rollup strategy in anesthesia services.”