BEST SMIDCAP IDEAS: TAKING ADVANTAGE OF HEALTHCARE SECTOR TAILWINDS
THE TD COWEN INSIGHT
WELL is our Top Pick. We think it can extend its lead as the largest owner/operator of outpatient medical clinics in Canada via its highly accretive and capital efficient clinic roll-up strategy. We don't believe its valuation properly reflects its strong execution and competitive position, expected margin and FCF improvements, and the potential value creation from the sale of Circle and/or Wisp.
Summary Of Our Thesis
At 9.4x EV/EBITDA (C2025E), a >40% discount to the peer group average, we believe the stock is attractively valued given prospects for double-digit organic growth and margins, solid FCF, hidden upside from its HEALWELL investment, and key near-term catalysts including the potential sale of Circle Medical and/or Wisp that could help fund significant share buybacks and/or debt repayments.
What Is Underappreciated Or Misunderstood?
Its unique ability to capitalize on the large, accretive, and capital-efficient clinic roll-up opportunity in Canada, particularly for clinic absorptions (~0.02x revenue multiple).
WELL's proven playbook to sharply improve clinic efficiency/margins.
Its HEALWELL AI investment (~C$27mm cost base) that is currently valued at ~C$246mm
(~C$1.00/share) or almost 25% of its market cap.
The potential accretion and value creation from the sale of Circle and/or Wisp.
Catalysts & Milestones To Watch
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The potential sale of its profitable, high-growth Circle and/or Wisp businesses. Strategic reviews are ongoing with "important updates" expected by year-end. The potential first sale announcement could help convince investors of the seriousness of WELL's intentions to re-focus on Canada and provide price discovery for the other business.
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Quarterly results and (upward) revisions to F2024 guidance. WELL has met/beat expectations for 4+ years and has also frequently raised guidance.
Price Target & How We Value The Stock
Our C$8.00/share target is based on a sum-of-the-parts valuation, given the different attributes of WELL's key businesses, and implies ~14.8x our C2025E Adj. EBITDA forecast, which is below the peer group average at 15.8x.
What Is The Bear Case & The Risks To Our Call?
Key risks include a slower pace of clinic M&A and/or a significant increase in valuations; margins stay flat or decline; no monetization of any U.S. business; and government/ regulatory risks.
WELL Health is the largest owner/operator of outpatient medical clinics in Canada, with >165 clinics country-wide, and it is extending its significant lead through its active and highly accretive M&A strategy with a healthy pipeline of clinic absorption/acquisition candidates. WELL is facing limited competition for these clinics, as we believe its scale, clinic transformation expertise, and unrivaled tech-enabled suite of clinic software/services give it a significant competitive advantage. Near-term catalysts include the potential sale of its very high growth and profitable Circle Medical and Wisp businesses, with net proceeds likely to be used to buy back stock and repay debt. Despite its strong financial and operational execution, in our view, including solid double-digit organic growth and Adjusted EBITDA margins, the stock continues to trade at a significant discount to its peers. We also see hidden value with its HEALWELL AI investment (represents ~25% of its market cap).