Yesterday, Canaccord came out with a research report on the newly listed Carebook Health Technologies (TSXV:CRBK) as well as a $2.50 price target on the company.
Here is snippet of what Canaccord had to say about Carebook:
“The company’s financial performance through 2020 is powered largely by a single contract with McKesson Canada; we expect Carebook to generate $4.0M in revenue in 2020 with a $2.5M EBITDA loss. Based on in-contract growth of this key customer win, leveraging its platform to secure two additional pharmacy customers in 2021, and closing an initial agreement with its first insurance industry customer in late 2020/2021, we model 211% revenue growth in 2021 (to $12.5M)and the company crossing the EBITDA breakeven threshold. Following the recent$21M financing, the company has adequate cash to see them through this threshold assuming they are successful in securing new contract wins over the next 6 – 9months. The company remains majority (54.7%) owned by private equity firms led by the company’s Executive Chairman, Dr. Sheldon Elman.”
“Our target price is DCF-based (16.5% WACC; 3.6% TGR) and equates to 4.3x EV/Sales, one year forward. This remains a substantial discount to the peer average until the execution track record improves. The company’s peer group, which includes several large healthcare IT integrators along with more SaaS-heavy digital health peers, is currently trading at 5.5xNTM EV/Sales. In addition, our list of precedent M&A transactions in the healthcare IT space suggests an average valuation of 7.3x EV/Sales and 22.7x EV/EBITDA."
And here are my thoughts....
Canaccord is projecting a massive 220% YoY increase in revenue growth due to Carebook transitioning from a healthcare IT integrator to a more SaaS-y model and successfully leveraging their current relationship with Rexall for their pharmacy virtual to attract new clients. Although the company is current operating at a loss, the analysts are projecting EBITDA to crossover into positive territory in 2021.
I guess Canaccord’s price target is fair. Although their target price equates to 4.3x EV/Sales which is lower than the average for the true peer group. I think their inclusion of several large IT-providers into the peer group slightly skews the results. In the last line there they say recent M&A has been at a 7.3x multiple. If you take the $12.5M revenue estimate for 2021 and multiply that by 7.3x, you get $91.25M enterprise valuation. EV is currently $36M.
Now let’s talk more about the business model.
Right now the model is quite risky given that a majority of their revenue stream comes from one single client. But this analyst is expecting that to change soon as CRBK leverages their success with Rexall to secure more big-name clients in other countries.
Their partners in the pharmacy vertical are Rexall/Mckesson. Partners for the clinic vertical are Telus Health, Medisys, and Copeman Healthcare Center. They are currently in discussions with a potential client for the insurance vertical.
Although there are some dilutive securities in play. Basic share count is 30M but looks like there is 44M fully diluted shares. Note that the management team, insiders and 5%+ shareholders are subject to a 180-day lock-up. Additionally, the stock held by MedTech and its affiliates (54.7% of the outstanding float) and insiders is subject to an escrow agreement that will see the stock released in increments over an 18-month period.
Carebook raised $20million at $2.50 back in August primarily through private equity firms, which means those PE firms were valuing this at $2.50 back in August. Since August, nearly every telehealth company is up 2-3x but CRBK is actually still down from its IPO price only a week ago. Which seems odd because they have made great progress since the money was raised.
Something I forgot to mention in my initial article on Carebook is that the former Premier of Quebec, Philippe Couillard, is on the board of directors. There is clearly a very well connected group of people backing this deal.
I do have doubts about the feasibility of the MyVitals screening tech, but even if you completely ignore that for now, there is still a ton of value here with the pharmacy vertical and collaboration with Mckesson/Rexall.
And if they actually do manage to get approval for their MyVitals screening technology, the valuations on Carebook stock will explode as the technology has applications in so many different industries throughout global markets.
DISCLOSURE: Author owns shares of Carebook Health Technologies and may choose to buy or sell at any time without notice. Author did not receive any compensation for publishing this article.
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