Post by
retiredcf on Mar 22, 2023 8:51am
CIBC Report
EQUITY RESEARCH
March 21, 2023 Earnings Update
WELL HEALTH TECHNOLOGIES CORP.
Ready To Take Advantage Of Shifting Healthcare Trends
Our Conclusion
WELL reported another solid quarter with Q4 results, and provided a 2023
outlook that expects revenue growth of 17%-20% and adjusted EBITDA
growth of 10%. While leverage does remain somewhat elevated, WELL is
now generating decent free cash flow that will accelerate deleveraging and
free up capital for clinical tuck-in M&A activity. With the Canadian Federal
government increasing healthcare funding and changes to funding models
and approaches to care in BC and Ontario signalling a willingness to direct
additional funds towards primary care doctors and private imaging clinics,
WELL is well positioned to take advantage of additional funds moving into
the Canadian healthcare space. Additionally the U.S.-based virtual services
continue to perform well, highlighted by Circle Medical finishing 2022 with
revenue of $69 million, up 250% Y/Y. We retain our Outperformer rating and
increase our price target from $6.50 to $7.00 as we roll our valuation year
forward into 2024.
Key Points
Clinical M&A A Priority: Commentary on the conference call made it clear
that the focus for capital allocation would be on acquiring Canadian clinics,
with a preference to focus on the opportunity within the primary care, allied
health and diagnostic clinical spaces. WELL expressed a desire to
significantly increase the number of clinics in its network, growing its network
from 130 to between 300-500 clinics over the next 4-5 years. While the target
appears lofty on its face, clinical acquisitions are currently closing at ~1x
EBITDA, and with many clinics operating with limited profitability profiles, the
target does seem somewhat attainable, in our view. Additionally, with smaller
clinics, WELL has been able to acquire these for nominal consideration,
assuming the operating responsibilities (leases, staffing, practice
management) and taking a share of billable revenue. As Canadian
governments increase spending on healthcare, moving further into the
primary care space is a sound strategic move, especially with WELL also able
to sell its patient enablement virtual solutions into the acquired practices.
Margin Compression Expected In 2023: With a 2023 guide that included
17%-20% revenue growth and 10% adjusted EBITDA growth, 2023 margins
are expected to be ~17%, down 140 bps from the 18.4% levels of 2022 and
20% margins in 2021. Profitability will be impacted cost inflation pressures
that are impacting the broader market, but also by a handful of company-
specific factors that management detailed on the call. Outsized growth in the
lower-EBITDA-margin Circle Medical and WISP businesses coupled with
additional sales & marketing investments to grow those businesses will
impact margins, as well as margin compression at CRH resulting from fewer
out-of-network billings due to the impact of the No Surprises Act. Gross
margins (excluding D&A) should also see some level of compression as
WELL focuses on lower-gross-margin clinical acquisitions and growing the
clinical business.