Have never been big fans but at least they raised their target (although still a Street low). GLTA
Focusing On The Sum Of The Parts Our Conclusion
Strong growth and better-than-expected profitability at Circle Medical led to a
Q2 revenue and EBITDA beat for WELL. With Circle still up for sale and
likely to be sold, we see strength there as more important for a potential sale
valuation than it is for the long-term thesis. That said, we view ~8% organic
growth across the business not for sale as healthy. WELL also outlined plans
to spin out its SaaS & Tech business as management continues to believe its
digital business is being undervalued within WELL. Our SoTP-based price
target still gets us to a $5.00 value (from $4.75), and we believe shares are
relatively fairly valued at current levels; as such, we retain our Neutral rating.
Key Points
WPS Spinout: The most notable takeaway from the conference call was
new plans to spin out WELL provider solutions (WPS) as a separate
controlled public company. WPS includes the digital businesses that support
Canadian physicians and practices, including EMR, eReferral, telehealth,
patient engagement, and more. Excluding lower margin cybersecurity, WPS
generated $10.4M in Q2/24 revenue with 24% organic growth, at 86% gross
margin and 30% adj. EBITDA margin. WELL clearly believes its digital assets
(WSP, Circle, WISP) are not being accurately valued within the broader
WELL business and that a WSP spinout would address the valuation gap.
With WELL planning on retaining a controlling stake and WSP only having
~$42MM in ARR, we do have concerns regarding the market’s willingness to
pay up for WSP as a separate public company.
Organic Growth Breakdown: WELL reported an impressive 21% organic
growth in the quarter, an acceleration from the previous four quarters. Of that
21%, 5% ($8.5MM) was related to clinic absorptions, and Q2 was the first
time absorption growth was specifically disclosed. Circle Medical was also a
major contributor to organic growth, as 53% Y/Y growth (all organic) made
up 6.5% of consolidated organic growth. WISP contributed 3% to
consolidated organic growth, MyHealth ~1%, and SaaS & Technology,
benefitting from a stronger cybersecurity quarter, contributed ~4%. With CRH
up 1.3% Y/Y including acquired CarePlus growth, organic growth was
negative due to $4.7M in one-time revenue in the prior year. Excluding the
assets potentially for sale, we believe organic growth was in the range of 8%.
Circle Medical Accelerates: Circle generated $32MM of revenue in Q2, up
53% Y/Y. Profitability improved significantly year-over-year, with adj. EBITDA
of $2.7MM (8.5% margin) up from ($1.1M) in Q2/23. Margins benefitted from
an accounting decision to capitalize a larger portion of software costs. Circle
hit a revenue run-rate of US$100MM in July, with revenue in the month up
65% Y/Y. The sale process remains ongoing and WELL named a financial
advisor on the process. We view a multiple in the range of 2x–3x sales as
reasonable (the broader universe of tech-enabled healthcare services trades
at ~2x 2024E sales), which would equate to proceeds of C$160MM-
C$240MM based on the current run-rate and WELL’s 58% stake.
Price Target Calculation
Our price target of $5.00 is based on a sum-of-the-parts valuation on 2025E shareholder EBITDA, applying a 10.0x EV/EBITDA multiple to the primary care and WELL Diagnostic businesses, a 9.0x EV/EBITDA multiple on the CRH/RADAR business, and valuing higher- growth Circle Medical and WISP virtual services business at 2.0x EV/Sales. We also include ~$0.50 of value for WELL's 39% fully diluted state in HEALWELL, which represents a 35% discount to current market prices given the volatility in the share price.