Not a bad read but as is obvious, this analyst has not been a big supporter. GLTA
Focusing On The Canadian Opportunity Our Conclusion
WELL shares closed up over 10%, with investors appreciating an updated
outlook that included a focus on free cash flow, discussion around limiting
share dilution, and further steps taken towards monetizing the U.S. virtual
services business and shifting the company’s focus towards the Canadian
business. The Canadian patient services business remains a focus, with a
healthy pipeline of acquisition and absorption opportunities of which to take
advantage. WELL included segmented adjusted EBITDA margins for the first
time, and while we appreciate the additional disclosure, it does highlight that
lower-margin acquisitions and margin pressure at CRH (-660 bps Y/Y) have
impacted consolidated margins. While we expect margins to improve over
the course of year and into 2025, we see valuation at current levels as
reasonable and retain our Neutral rating and $4.75 price target.
Key Points
Reducing Share Issuances: One of the main discussion points on the Q1
call was WELL’s intention to focus more on per share metrics, and to limit
dilution from share issuances in support of that goal. From the start of 2021
to the end of 2023, WELL’s share count went from 163MM to 237MM, an
increase of 45%. Going forward, incentive compensation will be paid in cash
rather than shares, and M&A consideration will favour cash over shares.
WELL also plans to spend a modest amount on share buybacks over the
course of 2024 as a signal that it intends to keep a close eye on share
dilution. Shifting from share-based compensation to cash incentives may end
up having an impact on adjusted EBITDA margins, as $26MM in stock-based
comp addbacks in 2023 added 340 bps to adjusted EBITDA margin, and
$5.5MM in addbacks in Q1/24 added 230 bps ($5.7MM) to adjusted EBITDA
margins.
Canadian Patient Services Are The Focus: When asked about the longer-
term vision for WELL, management emphasized the opportunity in Canadian
patient services, noting that WELL currently owned less than 1% of the
market, and sees a realistic path to reaching 5%-10% market share. The
pipeline for clinical assets is healthy, with 10 actionable absorption
opportunities and 30 more traditional acquisition opportunities. Multiples on
the more specialized diagnostic clinics have moderated in recent months,
and given the healthier margin profile of diagnostic vs. primary care (24%
adj. EBITDA margins vs. 8.8% in Q1), specialized clinics present an
interesting opportunity in addition to primary care.
One Step Closer To Action: WELL noted that it had hired advisors to
explore potential strategic alternatives for Circle Medical and WISP, taking
another step to potentially monetize those assets. In addition to
management’s belief that the market isn’t fairly valuing the assets, we
believe that one of the drivers behind a potential asset sale would be to
increase the focus on the Canadian business, with proceeds going to
reducing leverage and share buybacks