Q3/F24: BUSY TIMES AHEAD WITH A BURSTING M&A PIPELINE
THE TD COWEN INSIGHT
We expect strong near-term deal flow, given its full M&A pipeline. WELL has 17 LOIs representing >C$100mm in revenue that is expected to be at least margin neutral. Accordingly, we expect WELL to continue generating superior growth (incl. organic) with steadily improving margins. With several near-term catalysts (Wisp/Circle/WPS) and its discount valuation (10.6x C25 EBITDA), WELL is our Top Pick.
Impact: POSITIVE
Very active near-term M&A pipeline. WELL has 17 signed LOIs across its three business units in Canada and U.S., representing >C$100mm in revenue:
11 signed LOIs for 20 Canadian clinics with ~C$41mm in revenue. Balanced mix of acquisition (up to ~0.5x revenue/3-5x EBITDA) and absorption (<0.02x revenue) deals, which should help at least maintain margins.
Two larger opportunities for WPS pre-spin-out that could increase revenue by ~75% (details below).
One CRH deal is expected before year-end, as it shifts its focus from de-levering to M&A, as rates decline and its pipeline continues to build.
Opportunities for WELL Health Diagnostics, as valuations continue to moderate. On Oct. 1, it added four diagnostic imaging clinics in Alberta via the acquisition of a 51% interest in C-health Partners.
There is also 30 clinics at the pre-LOI phase with >C$55mm in revenue. WELL continues to extend its leading market share, as it has more clinics than the next five largest players combined.
Wisp/Circle strategic reviews on-track. Wisp's strategic review is at an advanced stage with multiple parties. A related announcement is expected by year-end, but could slip
to early 2025. Circle's strategic review is still in the early stages, as more preparation work was needed. An update is expected in Q1/F25. Both continue to generate very high, profitable growth (details here).
WPS bulking up prior to spin-out? WELL plans to significantly grow WPS pre-spin-out via the acceleration of two M&A opportunities that could grow WPS from ~C$40mm in ARR to ~C$70mm in ARR. WELL indicated these targets are high-quality, complementary healthcare tech names with strong and growing recurring revenues and margins.
WELL expects with these deals, WPS would remain a Rule of 40 company ahead of a planned spin-out in H1/25. When combined with its increased scale (which addresses a key investor concern), we think WPS should garner a premium valuation.
Minor estimate revisions. We have made minor revisions to our estimates, with ~1% increase to our F2024/25 revenue forecasts. Our Adjusted EBITDA estimate for F2024 is essentially unchanged with a ~1% decline in our F2025 estimate.