Aging Population And New Senior Care Beds Will Drive Powerful Long Term Tailwinds

Catalysts

About CareRx

CareRx is a leading provider of specialized pharmacy services to seniors living and long term care communities across Canada.

What are the underlying business or industry changes driving this perspective?

• Accelerating growth in new and redeveloped senior care beds, including tens of thousands of long term care projects coming online in 2026 and 2027, positions CareRx to add substantial high margin volume to an already scaled platform, supporting sustained revenue growth and EBITDA expansion.
• Structural demand from an aging population requiring complex medication management increasingly favours specialized pharmacy providers like CareRx, driving steady increases in average beds serviced and supporting multi year visibility on top line and earnings growth.
• The ongoing rollout of hub and spoke operations and mega fulfillment centers such as Oakville and Burnaby allows greater use of high volume packaging technology, reducing incremental labor per bed and providing a clear path to double digit EBITDA margins and widening net margins.
• Growing consolidation among senior housing and long term care operators creates larger, system wide contract opportunities where CareRx’s national scale and integrated clinical programs are competitively advantaged. This supports faster contract wins, higher retention and more resilient revenue.
• Increasing recognition by provincial governments of the role of pharmacy in improving outcomes and reducing hospital use, combined with CareRx’s deep engagement with policymakers and industry bodies, supports a favorable policy environment that can stabilize professional fees and enhance earnings predictability and cash flow.
• A strengthened balance sheet with net debt to adjusted EBITDA below one times and consistent positive free cash flow provides capacity to pursue accretive M&A, organic bed additions and technology investments, enabling potentially outsized growth in earnings per share relative to revenue.

Assumptions

This narrative explores a more optimistic perspective on CareRx compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming CareRx's revenue will grow by 7.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 0.0% today to 0.9% in 3 years time.
• The bullish analysts expect earnings to reach CA$4.2 million (and earnings per share of CA$0.55) by about December 2028, up from CA$93.0 thousand today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 115.3x on those 2028 earnings, down from 2511.7x today. This future PE is greater than the current PE for the CA Consumer Retailing industry at 22.6x.
• The bullish analysts expect the number of shares outstanding to grow by 1.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.52%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Revenue growth is increasingly dependent on adding new beds in a competitive RFP driven environment, and management acknowledged that recent bed growth was modest and some expected onboards slipped into the next quarter. This suggests that delays in project timing, intensifying competition for major contracts like Extendicare, or failure to win a meaningful share of the 58,000 new and redeveloped beds in 2026 and 2027 could leave CareRx with slower structural bed additions over time and constrain revenue and EBITDA growth.
• Management continues to flag the possibility of professional fee reductions in Ontario and must negotiate economics with provincial payors and large consolidating home operators. Any long term reset of pharmacy reimbursement, pressure on pricing from large REITs and operators, or an unfavorable shift in branded versus generic drug mix (such as the flat year over year revenue despite higher beds this quarter) could compress gross margins and limit net margin expansion even if volumes keep rising.
• The bullish thesis assumes durable efficiency gains from mega fulfillment centers and hub and spoke operations. Management has indicated that full efficiencies from facilities like Burnaby are still in the future and they are only part way through lean management rollouts. If technology adoption takes longer, capital spending of around 8 million to 10 million annually fails to deliver expected productivity, or execution missteps emerge as the network scales, the company may fall short of its double digit EBITDA margin ambition and earnings growth could lag.
• Capital allocation has shifted toward dividends and share buybacks alongside ongoing CapEx and potential M&A. While the balance sheet is currently strong with net debt to adjusted EBITDA at 0.9 times, sustained cash returns to shareholders combined with larger acquisitions or expansion into new markets such as Quebec could reduce financial flexibility over the long run and increase leverage. This would heighten downside risk to free cash flow, net income, and the company’s ability to fund organic growth in a downturn.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for CareRx is CA$6.05, which represents up to two standard deviations above the consensus price target of CA$4.86. This valuation is based on what can be assumed as the expectations of CareRx's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$6.25, and the most bearish reporting a price target of just CA$4.5.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be CA$449.7 million, earnings will come to CA$4.2 million, and it would be trading on a PE ratio of 115.3x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of CA$3.72, the analyst price target of CA$6.05 is 38.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.