On today’s Breakouts report, there are nine stocks on the positive breakouts list (stocks with positive price momentum), and 68 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a security on the positive breakouts list: DRI Healthcare Trust (DHT-UN-T). The Trust began trading on the Toronto Stock Exchange in Feb. 2021 and was in a downtrend until Feb. 2022, when the unit price finally stabilized. In recent months, the unit price has been recovering. Year-to-date, DRI is the second best performing stock in the S&P/TSX Small-Cap HealthCare Sector with a gain of 22 per cent as of the close on July 15. The unit price is still trading well below its initial public offering price. That being said, the recent positive price momentum may continue. On the first-quarter earnings call held on May 11, management stated that two royalty deals may be announced within roughly the next 60 days – which means any day now.
The stock has a unanimous buy recommendation from six analysts. The average target price is C$14.92, which implies a potential price return of 81 per cent over the next 12 months.
A brief outline on DRI is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
DRI HEALTHCARE TRUST
8.71+1.96 (29.04%)
YEAR TO DATE
Toronto-based DRI holds a diversified portfolio of 18 pharmaceutical royalties, generating income from 14 pharmaceutical products including Spinraza, Eylea and Xolair as of March 31. The products are marketed by companies such as AstraZeneca, Biogen, Johnson & Johnson, Novartis, Regeneron and Roche.
DRI trades on the Toronto Stock Exchange under the tickers DHT-UN-T (denominated in Canadian dollars) and DHT-U-T (denominated in U.S. dollars).
Investment thesis
· Recession resistance: generates royalty streams from sales of pharmaceutical products.
· Growth through the purchase of pharmaceutical royalties. Management targets deploying between $650-million and $750-million in royalty deals by 2026 (has completed $161-million to-date) funded from cash, royalty income generated and its credit facility. In April, the credit facility was increased to $350-million from $150-million. In 2021, DRI completed two royalty transactions. In the first-quarter of 2022, DRI funded one royalty deal.
· Attractive yield.
· Key potential risks: 1) patent expirations; 2) regulatory risks; 3) ability to complete new royalty transactions; 4) competitive environment; 5) expiration of royalty entitlements.
Quarterly earnings
All financial figures are reported in U.S. dollars.
After the market closed on May 10, DRI reported its first-quarter financial results. Total income was $21-million. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $17.8-million, relatively in-line with the Street’s forecast of $17.5-million. Adjusted earnings per unit came in at 49 cents. The following day, the unit price declined 1 per cent.
On the earnings call, chief executive officer of DRI Capital Inc. Behzad Khosrowshahi indicated that a couple of deals could be announced in the near-term: “We have three deals right now that are effectively under exclusivity and we hope to be able to close on at least two of these transactions in the next 60 days or so.”
Returning capital to its unitholders
The company pays its unitholders a quarterly dividend of U.S. 7.5 cents per unit or U.S. 40 cents per unit yearly, equating to a current annualized yield of 4.8 per cent – excluding the yearly special distributions.
In January, the company paid its unitholders a special distribution of U.S. 22 cents per trust unit.
Management intends to distribute between 20 per cent and 30 per cent of its available cash generated each year with four quarterly distributions along with one special distribution.
During the first quarter, the Trust repurchased 477,980 units at an average price per unit of U.S. $5.25 as part of its share buyback program. In April, the Trust repurchased 1,043,070 units. Under its normal course issuer bid, the Trust can purchase up to 2,500,000 units until Oct. 4, 2022.
Analysts’ recommendations
There are six analysts providing research coverage on the company and all six analysts have buy recommendations.
The firms providing research coverage on the company are as follows in alphabetical order: Canaccord Genuity, Industrial Alliance Securities, National Bank Financial, RBC Capital, Scotiabank and Truist Securities.
Revised recommendations
In May, three analysts revised their target prices.
· Industrial Alliance’s Chelsea Stellick reduced her target price by $1 to Cdn $13.
· National Bank Financial’s Endri Leno tweaked his target price to US $9.75 from US $10.
· Scotiabank’s Adam Buckham trimmed his target price to US $14 from US $16.
Financial forecasts
The consensus EBITDA estimates are US $79.2-million for 2022, increasing to US $85.6-million in 2023.
The consensus EBITDA estimates have been relatively stable. For instance, four months ago, the consensus EBITDA estimates were US $78.7-million for 2022 and US $83.3-million for 2023.
Valuation
The stock is commonly valued on an enterprise value-to-EBITDA basis as well as on a discounted cash flow basis.
According to Bloomberg, the Trust is trading at an EV/EBITDA multiple of 3.4 times the 2023 consensus estimate.
According to Bloomberg, the average one-year target price is Cdn $14.92, implying the unit price may appreciate 81 per cent over the next 12 months. Individual target prices are as follows: U.S. $9.75, Cdn $13, US $14, Cdn $14, Cdn. $14.50, US $15 (from Truist Securities’ Gregory Fraser).
Insider transaction activity
Year-to-date, there has not been any trading activity in the public market reported by insiders.
Chart watch
Trading history is brief since the Trust just began trading on the Toronto Stock Exchange on Feb. 11, 2021. As a result, technical analysis is limited.
The unit price is trading 37 per cent below its initial offering price of US $10. Immediately after the unit price started trading on the TSX in Feb. 2021, the unit price came under pressure, making lower high and lower lows over the next 12 months. In Feb. 2022, the unit price stabilized and has since been recovering.
Year-to-date, the unit price is up 22 per cent, making it the second best performing stock in the S&P/TSX SmallCap HealthCare Sector, behind Viemed Healthcare Inc. (VMD-T), which is up 42 per cent. Over the past month, DRI’s unit price is up 8.4 per cent.
Looking a key resistance and support levels, the unit price is approaching an initial ceiling of resistance around Cdn. $8.70, near its 2022 closing high (closed at Cdn. $8.69 on April 12). After that, there is overhead resistance around Cdn. $10. Looking at the downside, units of DRI have initial support between Cdn. $7 and Cdn. $7.50, close to its 50-day moving average at Cdn. $7.49 and its 200-day moving average at Cdn. $7.26. Failing that, there is strong technical support around Cdn $6.
This small-cap security has low liquidity, which can increase price volatility. The three-month historical daily average trading volume is approximately 43,000 units.