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January 18, 2022
Sector Perform (prev: Outperform)
Price Target CAD 56.00
Andlauer Healthcare Group Inc.
Despite excellent execution, lowering rating to Sector Perform as shares reach our fair value
Our view: Management has done an impressive job since taking the company public, navigating through the pandemic and building out logistics capacity as well as executing on strategic acquisitions. With the shares now up over 3.4x since IPO, we think the valuation now reflects the company’s solid fundamentals, its strong management team, and a pick-up in M&A activity post pandemic. Accordingly, we downgrade AND to Sector Perform (from Outperform), reflecting relative returns.
Key points:
What we are building into our forecasts? It is rare that we reduce our rating on a stock that has had such strong results and has such a positive long-term outlook. We note that our out-year estimates incorporate high- single-digit organic growth on the back of solid demographic trends as well as structural tailwinds in healthcare logistics. We assume steady (to slightly higher) margins out to 2023 and then build in a meaningful pick-up in M&A activity into our valuation. We apply a 16x target multiple, which is well above peer averages to reflect strong management execution and long-term growth drivers unique to Andlauer, to our M&A adjusted EBITDA estimate. This results in a price target roughly in line with current market prices; we therefore view AND as fairly valued and expect more modest returns going forward.
Recent share price performance. AND shares are up over +18% off recent lows post Q3 results on no significant news, and are up +41% since July 2021 (AND did, however, execute on two meaningful US acquisitions in October). We note that AND’s forward valuation is now at 16x on consensus NTM EV/EBITDA estimates. Our view is that valuation now reflects solid organic growth, steady margins, and a meaningful pick-up in M&A activity. While this aligns with our expectations, we note that our price target implies a return to target of +9%, and we therefore lower our rating on the shares based on relative returns.
Downgrading to Sector Perform (from Outperform); maintaining $56 price target. Our estimates remain unchanged into the quarter. Our 2023 EBITDA estimate remains at $147MM (cons. $152MM) and reflects high- single-digit organic growth and 40 bps of margin expansion versus 2021E. Applying a 16x (unchanged) target multiple to our 2023 EBITDA estimate, adjusted for M&A, results in our $56 price target (unchanged). Our price target implies a return to target of +9%, and we therefore reduce our rating to Sector Perform to reflect lower relative returns.
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