WELL Health Technologies Corp T.WELL

TD 2

[retiredcf]

Q2/F24: PROVIDER SOLUTIONS (SAAS) SPINOUT PLANNED; MORE TO COME?

THE TD COWEN INSIGHT

We are surprised at the share price weakness following the Q2 beat/raise, with solid performances across almost all key metrics, including a much anticipated margin rebound. We don't think the potential slight delay in the Wisp/Circle strategic review announcements is concerning, while other initiatives to help unlock shareholder value, including one or more spinouts, are key near-term catalysts.

Impact: SLIGHTLY POSITIVE

Provider Solutions spinout in the works. Building on WELL's plans to help unlock shareholder value (a key theme of its recent Investor Day), which includes the ongoing strategic reviews of Wisp/Circle, it announced plans to spin out its WELL Provider Solutions (WPS) business. WPS is WELL's SaaS & Tech business excluding the (lumpy) cybersecurity business (overview in Fig. 2 on Pg. 4). WPS serves >37k practitioners, including ~1/3 of all Canadian doctors, in >4k clinics.

In Q2/F24, WPS' revenue grew 24% y/y organically to C$10.4mm (>90% recurring) with 86% GM and 30% EBITDA margins, making it a Rule of 50 company.

The spinout is planned for H1/F25 and WELL intends to retain a majority stake. We believe this is important to ensure the business, which is critical to the success of its Canadian clinic business, continues to align with WELL's overall strategic direction.

Canadian small cap healthcare tech is trading at healthy valuations. WELL believes a WPS spinout would trade at a higher valuation to itself, which we would agree given WPS' much higher mix of contracted recurring revenue and margins.

We note that similarly sized Canadian small cap healthcare software peers trade at much higher valuations, including Kneat (KSI-T) at 6.3x, Vitalhub (VHI-T) at 5.2x, and soon-to-be majority owned HEALWELL AI (AIDX-T) at 6.9x EV/Revenue (C2025E) compared to WELL at 1.3x. Even factoring in a valuation discount for WELL's controlling stake, it seems like there could be good valuation creation with this spinout.

We also note the smaller Canadian small cap SaaS universe following elevated M&A activity since early 2023 (details in our April 2024 M&A report), which could allow WPS to benefit from some scarcity value for high quality small cap SaaS names.

WELL is hesitant to pursue M&A in this space, given the much higher valuations in the healthcare software space (and the very attractive clinic valuations). Accordingly, spinning out WPS would allow it to more aggressively grow through M&A to complement its strong organic growth.

More spinouts ahead? If the WPS spinout is successful, we believe more spinouts could be in store.

[BigTT13]

I'll likely buy the spin out co. as Hamed is good at the penny micro pumps but I can't get behind the idea that spinning out a core asset is good for WELL. Just another of the many cogs in what has quickly becoming a convoluted financial situation. imo Rule 1 - convolute and confuse everything, that way one can explain things through multiple avenues when questioned. I'll watch this

[SunsetGrill]

Spinning out a company which you will still have majority ownership over while increasing the multiple of the spinout and have an infusion of cash. How is that a terrible idea? They are not getting rewarded/values  propertly the way it sits now..... So this is a way to fix it. 

[Possibleidiot01]

The ongoing evolution of WELL continues ; now they're going to be an incubator of companies ! I guess the success of AIDX provided the impetus. So , once again , they've shifted the goalposts on investors. Started as a health care company with  some capital venture investment ( Circle and WISP) to we're going to be a clinic operating giant in Canada ....... to an incubator of

[brandinvestor]

Their end goal is to sell the company IMO and in this case this sets it up to be done at a much higher amount.  Nobody is going to want every piece of the pie. Splitting the different businesses to their own business would allow them to sell pieces of the company to buyers at the correct evaluation. 

[FishBC]

I bought this stock because I thought it purported to be the company that can create and mange a seamless omnichannel access to healthcare at the clinic level. Wether digital, telecom or in person the seamless providing of services would be digitized and better managed than historically (I know many docators and admin is there pharia). This would be where margin would be available to harvest for

[Jonathan2022]

I'm not sure I agree, they don't intend on spinning out and liquiditating. They were very clear on retaining a strong majority and continuing to operate and benefit from having the tech available to them. It seems like they are doing this to create a clear valuation profile for something that is currently hidden by all the clinical revenues. It also helps them create stock value that they