Fund Manager believes one of the Canadian tech stocks will be acquired sometime in 2020
Capital Ideas Media | June 9, 2020 | SmallCapPower: Capital Ideas Media Publisher Mark Bunting wrote: Three Canadian tech stocks recently caught our eye. Two of them are very on point delivering health care in the home and the third sells a full suite of in-house and cloud-based (hybrid) information technology solutions.
(Originally published on Capital Ideas Media on May 5, 2020)
Let’s start with ProTech Home Medical (TSXV:PTQ), a provider of a range of medical devices and services for in-home healthcare patients.
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PTQ was the Top Idea for 2020 of Paul Beattie, CEO of BT Global Growth, in our January 7, 2020 Digest.
The stock was trading at $0.96 when Beattie chose it and it’s now at $0.94, as of this writing [Editor’s Note: Protech stock has increased 25% since to its current price of $1.17].
I asked Beattie what he thought of PTQ’s prospects now and he had this to say:
“I still love the stock. Incredibly good value.
The stock trades at under four times EBITDA simply because it is under known. A U.S. company that trades only in Canada might be the cause. Also management are anything but promotional.
The U.S. government recently gave PTQ a grant equal to more than five percent of the value of the company, that’s right, tax free revenue, and the stock didn’t move. This is proof positive no one is paying attention.
PTQ cannot stay at these cheap multiples forever and must certainly be on larger companies radar screens. My bet is they are gone by Xmas.”
Industrial Alliance Securities has started coverage of ProTech Medical with a price target of $2.40, which is right around the consensus number from analysts who cover the company.
That implies a projected return of a more than 140%.
Here’s some commentary on the Kentucky-based ProTech Home Medical from Industrial Alliance analyst from Chelsea Stellick:
“DME is a highly fragmented market with more than 6,000 providers in the U.S., 70 per cent of which have annualized revenues below $15 million.
Given its track record of immediately accretive acquisitions and its strong M&A team, PTQ is well positioned to acquire the smaller competitors in the Midwest and East Coast regions that have stable revenue generation of $4-12-million and 5-10-per-cent EBITDA margins.
There is a strong and growing demand for DME due to an ageing population, a patient’s preference to be at home, and the increasing prevalence of chronic diseases requiring long-term care.
The DME market is expected to grow at a 5.6-per-cent compound annual growth rate before reaching $98.4 billion (U.S.) by calendar 2028, up from nearly $55 billion in calendar 2018.
This supports management’s target of 3-5-per-cent organic growth per year. However, PTQ believes that it can grow at 6-10 per cent by including strategic acquisitions and additional product lines within its existing markets.
PTQ trades at a significant discount to its peers at 5 times versus 11 times fiscal 2020 estimated enterprise value-to-adjusted EBITDA.
That’s unwarranted given its strong track record of successfully improving profitability, its robust recurring revenue model, and its aggressive growth strategy to achieve over $200 million in revenue and a 25-per-cent EBITDA margin in three to five years.
We apply an 11 times multiple on our fiscal 2020 adjusted EBITDA forecasts.”
Time for an update on WELL Health Technologies (TSX:WELL), the tele-health company we featured in March of last year that gained as much as 320% in the ensuing months.
Tele-health is just getting started across Canada, according to Stifel GMP analyst Justin Keywood, who gives the stock another 20% upside and thinks WELL could eventually be an attractive acquisition for private equity, or the likes of Telus Health or Loblaw.
WELL Health, you may recall, was founded by CEO Hamed Shahbazi, who sold Tio Networks to PayPal in 2017 for $238 million, and boasts legendary billionaire Hong Kong investor Li Ka-Shing as a shareholder.
WELL has about 20 primary care clinics, along with an electronic medical records business, and a tele-health platform named VirtualClinic+.
VirtualClinic+ is a platform connecting patients to doctors through video, phone and secure messaging. Patients outside of WELL’s clinics who do not have a doctor can as also use the service.
“We see tele-health as here to stay, which greatly increases the opportunity set for innovation to bridge patient care virtually, where WELL is in a strong position to capitalize,” according to Keywood.
WELL is taking advantage of its record high share price by raising $12.5 million through a bought-deal financing with a syndicate of underwriters that will purchase 5.682 million common shares for $2.20 each. The stock is currently trading around $2.35 [Editor’s Note: It is now at $2.77].
Raymond James started coverage of Converge Technology Solutions (TSXV:CTS) with an “outperform” rating and $2.35 target. The stock is trading around $1.27.
Raymond James said:
“CTS is building a leading North American hybrid IT solution provider reselling not just products, but also a full suite of infrastructure, software, and managed services solutions (cloud, cyber security, analytics). These solutions leave CTS poised to benefit from strong secular trends while their deep technical/domain expertise allows a solutions approach and higher profit margins.”
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