Medical Facilities Corp. is undervalued, says Canaccord Genuity

Following the company’s first quarter results, Canaccord Genuity analyst Neil Maruoka says he sees increasing signs of stabilization at Medical Facilities Corp. (Medical Facilities Corp. Stock Quote, Chart, News: TSX:DR).

Yesterday, Medical Facilities Corp reported its Q1, 2017 results. The company posted income from operations of (U.S.) $13.3-million on revenue of $89-million, a topline that was up 17.2 per cent over the same period a year earlier.

“We are very pleased with the continued growth in case volume and revenue, driven by growth from newly acquired centres as well as organic growth initiatives at existing facilities,” said CEO Britt T. Reynolds. “Our facilities continue to hold leading positions in their communities by building strong networks and maintaining solid reputations for the highest quality care and optimum patient outcomes.”

Maruoka says the results were in-line with his top line expectations but missed on the bottom line. He says results were impacted by Unity Medical and Surgical Hospital, which Medical Facilities acquired an 83 per cent interest in last September, and notes that without this drag on margins the results would have looked a lot different.

“We note that 6.8% organic revenue growth was driven by an increase in case volumes across most facilities, which also creates a trade-off with weaker operating margins,” says the analyst. “EBITDA was $20.1M (22.6% margin), below our forecast of $22.2M (25% margin) due, in part, to higher G&A and drugs and supplies expenses. However, we note that Q1 results were largely impacted by the absence of a key physician at Unity, which created a transient $2.4M drag on operating income as the physician was back operating in March. Excluding this impact, we estimate that operating margin would have been ~25.6% in Q1.”

In a research update to clients today, Maruoka maintained his “Buy” rating and one-year price target of $22.50 on Medical Facilties Corp. implying a return of 41.7 per cent at the time of publication.

Maruoka thinks DR will post EBITDA of $105.9-million on revenue of $378.4-million in fiscal 2017. He expects these numbers will improve on the bottom line to EBITDA of $113.9-million on a lower topline of $375.9-million the following year.