Announces tuck-in acquisitions; expects to enhance operating margins by ~1000bps over 2 yrs
TSX: WELL | CAD 4.16 | Outperform | Price Target CAD 6.00
Sentiment: Positive
Our initial view: WELL announced that it has acquired three primary care clinics in British Columbia and has executed definitive agreements to acquire four diagnostic imaging clinics in Alberta over the last 10 days. The acquired clinics generate annualized combined revenues of $17.8MM at 7% operating margins (pre-synergies). The acquisitions were financed utilizing cash on hand at 4x adj. EBITDA (upfront) and ~5.6x adj. EBITDA with fully-paid earnouts. WELL aims to improve the operating margins of the acquired clinics by an average of 1000bps within the next 1-2 years, which should support strong ROICs at these facilities, in our view. The company also shared a pre-tax unlevered ROIC metric of ~14% for its CDN clinics, which consists of ~11% ROIC at the Diagnostics clinics and ~25% ROIC at its primary care clinics.
Acquired three primary care clinics and executed definitive agreements to acquire four diagnostic imaging clinics. Over the last 10 days, WELL has completed the acquisition of three primary care clinics in British Columbia and executed definitive agreements to acquire four diagnostic imaging clinics in Alberta. These businesses had combined annual revenues of $17.8MM at 7% operating margins (pre-synergies). The company noted that these tuck-in acquisitions were financed from cash on hand at 4x adj. EBITDA (upfront) and ~5.6x adj. EBITDA with fully-paid earnouts. WELL aims to improve operating margins by an average of 1000bps at the acquired clinics within the next 1-2 years, which should support strong ROICs at the acquired clinics, in our view.
Strong ROIC metrics at CDN clinics. The company also shared pre-tax unlevered ROIC metric of ~14% for CDN clinics, which consists of ~11% ROIC at its Diagnostics clinics and ~25% ROIC at its primary care clinics (likely aided by absorption clinics, where WELL acquires loss making clinics for nominal cash costs, equating to a <0.02x revenue multiple). Management noted that at a 14% pre- tax unlevered ROIC, the company is consistently creating returns well above its cost of capital. We estimate a cost of capital of ~7.6% for the entire company based on cost of equity of ~8.4% and post-tax cost of debt of ~5.3% (see pg 5 here for our cost of capital calculations).
Updates on recently acquired primary care clinics. WELL acquired/absorbed 21 primary care clinics in Q4/23 including the legacy MCI OneHealth and MB Clinic networks and 10 primary care clinics from Shoppers Drug Mart in June 2024. All these clinics were operating with negative adj. EBITDA margins at the time of acquisition. This cohort of clinics is now operating profitably, with MSD operating margins for the legacy MCI OneHealth and MB Clinics, and slightly lower margins for the more recently acquired Shoppers Drug Mart clinics demonstrating the effectiveness of WELL's clinic transformation team to transform loss-making clinics. The company has doubled its clinic transformation team from last year to 6 core members (excluding WELL's shared services team) and management expects to further ramp up the team.
Growing clinic acquisition pipeline. The company noted that its CDN clinic acquisition and absorption pipeline has grown to 5 signed LOIs that generate $11.8MM in revenues at 5% operating margins and more than 50 clinics in pre-LOI review. Management noted that the company continues to expand its CDN clinic pipeline where the company is able to generate superior rates of ROIC, while looking to seek liquidity from certain US assets (Circle Medical and Wisp).