WELL Health Technologies Corp T.WELL

RBC 2

[retiredcf]

Their upside scenario target is a double ($9.00). GLTA

August 14, 2024

Outperform

TSX: WELL; CAD 4.44

Price Target CAD 6.00

WELL Health Technologies Corp.

Q2/24 results ahead of estimates, 2024 revenue guidance increased; reiterating Outperform

Our view: Q2 revenue and adj. EBITDA exceeded estimates. The company raised its FY24 revenue guidance by $10MM to $970–990MM (+25-28% y/y) and reiterated FY24 adj. EBITDA to be at the “upper end” of the $125–130MM (+10-15% y/y) range. Management expects updates on the strategic review for Wisp later this year and for Circle Medical early next year. To further unlock shareholder value, management is also exploring a potential spinout of the WELL Provider Solutions business, in which WELL intends to maintain a strong economic and voting majority.

Key points:

Revenues and adj. EBITDA ahead of estimates. Q2 revenues of $243.1MM (+42% y/y) were ~2.2% above RBCe ($237.9MM) and ~2.8% above cons. ($236.6MM). Adj. EBITDA of $30.9MM (+11% y/y) was ~4.2% above RBCe ($29.6MM) and ~4.6% above consensus (~$29.5MM). Adj. EBITDA to WELL shareholders of $23.0MM (+8% y/y) was below RBCe ($24.3MM).

2024 outlook – raised revenue guidance by $10MM; reiterated adj. EBITDA guidance. WELL provided updated 2024 revenue guidance of $970–990MM (+25–28% y/y; ~15% organic growth at the midpoint), which was ~$10MM above prior guidance of $960–980MM. The annual adj. EBITDA guidance was reiterated to be at the “upper end” of the $125– 130MM (+10–15% y/y) guidance range.

Updates on strategic alternatives for Circle and Wisp. Management expects updates on the strategic review for Wisp (~53% ownership) later this year and for Circle Medical (~58% ownership) early next year. WELL has certain options on Circle and Wisp that expire in Q4/24 (Circle Medical option extended into 2025). Under these options, WELL has several alternatives that include: 1) call options on the outstanding shares currently not owned by WELL; 2) a right to take Circle and Wisp public; 3) bring in PE players to take minority ownership; and 4) engineer an outright sale.

Strategic spinout of the WELL’s Provider Solutions (WPS) group.

Management noted that excluding cybersecurity, the Provider Solutions Group achieved revenues of $10.4MM (+24% y/y organic) in Q2/24, with 86% GMs and 30% EBITDA margins. Additionally, 90% of these revenues are contractual and recurring. WELL intends to maintain a strong economic and voting majority in the potentially spun-out entity. Management noted that WPS group would continue to work closely with and support WELL’s clinics and clinic transformation team. Management expects to provide additional details in the coming weeks/months and noted a potential timeline of H1/25. We await further details (including the potential float) before making any changes to our valuation. Our valuation for WELL shares is based on an average of a SOTP analysis and a longer-term DCF. Within our SOTP, we value the SaaS and Tech segment (including the lumpy and lower margin cybersecurity business) at 2.0x EV/Revenue and 12.0x EV/EBITDA

Taking a closer look at Q2/24

WELL reported revenues ahead of estimates with strong outperformance in US and CDN Patient Services. WELL reported Q2/24 revenues of $243.1MM (+5% q/q; +42% y/y), ~2.2% above RBCe ($237.9MM) and ~2.8% above consensus ($236.6MM). The revenue strength vs. RBCe was led by better-than-expected performance in US Patient & Provider Services segment and CDN Patient Services, partially offset by weaker-than-expected SaaS and Tech Services. US Patient and Provider Services revenues of $149.5MM (+45% y/y) were ~4% above estimates (RBCe: $144.0MM, consensus: $144.1MM). Within the segment, Circle Medical revenues were $32.0MM (+11% q/q; +53% y/y), ~7% ahead of RBCe ($29.9MM) and ~9% ahead of consensus ($29.3MM); Wisp revenues were $24.3MM (+15% q/q; +27% y/y), ~6% ahead of RBCe ($23.0MM) and ~2% ahead of consensus ($23.7MM); CRH and Radar combined revenues were $93.3MM (+3% q/q; +47% y/y), ~2% ahead of RBCe and consensus estimates. CDN Patient Services revenue of $76.7MM (+42% y/y) was ~1% ahead of RBCe ($75.9MM) and ~2% ahead of consensus ($75.5MM). SaaS and Technology revenue of $16.9MM (+27% y/y) was in line with consensus ($16.9MM) but ~6% below RBCe ($18.0MM). WELL reported organic growth of 21% y/y in Q2/24 (vs. 13.5% in Q1/24) including absorptions (16% y/y excluding absorptions vs. 10% in Q1/24). Organic growth at CDN clinics was 25.5% y/y including absorptions and 11.4% y/y excluding absorptions.

Q2 adj. EBITDA ahead of estimates. WELL reported Q2 adj. EBITDA of $30.9MM (+9% q/q; +11% y/y), ~4.2% above RBCe ($29.6MM) and ~4.6% above consensus ($29.5MM). Adj. GMs of 44.2% in the quarter increased q/q (44.1% in Q1/24) and were slightly below RBCe and consensus (~44.3%). Adj. EBITDA margin of 12.7% was up q/q (12.2% in Q1) and ahead of RBCe and consensus (~12.5%). Adj. EBITDA to shareholders of $23.0MM (+3% q/q; +8% y/y) was below RBCe ($24.3MM). Free cashflow attributable to WELL shareholders was $8.7MM during Q2/24 ($9.4MM during Q2/23). During the quarter, WELL paid down ~$14MM in debt and reduced its bank debt leverage ratio to 2.67x from 2.75x in Q1/24. Leverage including convertible debt was 3.45x as of Q2/24.

Updates on the clinic digitization and transformation program. For the 2023 cohort (which included loss-making clinics acquired from MCI and the Manitoba clinic), management noted that the digitization and transformation efforts at these clinics are running ahead of plan, and both Manitoba and MCI Ontario are running at positive adj. EBITDA. Management expects continued improvement in adj. EBITDA margins at these clinics over the next year.

As it relates to the recently acquired loss-making clinics from Shoppers Drug Mart (here), management highlighted that the digitization and transformation efforts at these clinics are also tracking ahead of plan, and these clinics are almost at breakeven.

In our view, the market is currently underappreciating the long-term value creation opportunity in transforming CDN primary/ Dx care, as underscored by our strong forecasted ROIC and IRR metrics for recent acquisitions. Previously, WELL has added >500bps in EBITDA margin, on average, to primary/Dx clinics post purchase, leading to strong ROIC metrics. Our work suggests that the recent MCI/Manitoba clinic acquisitions could generate ROIC of >30% in aggregate over time and an IRR of ~30%. For additional details, please see our initiation report on WELL Health (see pages 20–21, here).

M&A pipeline. WELL’s pipeline of new clinic opportunities consists of more than 50 clinics including absorption clinics (clinics are absorbed into the WELL network with minimal upfront payment). Under the clinic absorption model, WELL acquires clinics for nominal cash costs in the range of <0.02x revenue multiple, whereas for the regular M&A program, WELL pays up to ~0.5x revenue or ~3–5x EBITDA. Management also noted continued strong discussions with various players in the CDN diagnostic industry with potential expansion into more provinces  as well as within Ontario. The company is also starting to establish a pipeline for the provider solutions, SaaS and Technology segment given the potential for a standalone public company. Management noted that the company is on track to achieve $1B in revenues by the end of 2024 including acquisitions that are currently in the pipeline.