CEO departure is bad timing for Medical Facilities Corp, says Canaccord Genuity

An abrupt exit for its CEO has left Canaccord Genuity analyst Neil Maruoka wondering just how deep Medical Facilities Corp’s (Medical Facilities Corp.Stock Quote, Chart, News: TSX:DR) bench is.

Yesterday, Medical Facilities Corp. announced its president and chief executive officer Britt T. Reynolds left the corporation and resigned as a member of the board. The company said board member Jeffrey Lozon would fill the role of interim CEO, beginning immediately.

“We are pleased that Jeff is stepping into this role,” said board chair Marilynne Day-Linton. “His leadership experience in both the U.S. and Canadian health care markets, as well as his knowledge of MFC’s business and strategy, make him well suited to direct the corporation through this transition. The company’s growth strategy and the strong expertise in both the senior management team and leadership at the centres securely positions MFC for continued success.”

Maruoka says the company’s value proposition just took on a lot more risk.

“Given the abruptness of the departure and the lack of details provided, we assume that his exit was related to a disagreement with the board,” says the analyst. “Regardless, we believe this news comes at a bad time for Medical Facilities, as the company is just starting to show signs of margin stability after several quarters of weakness; moreover, MFC has struggled to integrate Unity, which was a recent acquisition driven largely by the former CEO. Mr. Reynolds will be replaced on an interim basis by board member Jeffrey Lozon; however, given that it took months to identify Mr. Reynolds, we believe that leadership uncertainty could linger. We expect the stock will trade lower on this news, but we also believe it will eventually find support from its current 6.9% yield. Nonetheless, given the leadership uncertainty and the unfortunate timing, we see significantly higher risks for shareholders in the near term.”

In a research update to clients today, Maruoka downgraded Medical Facilities Corp from “Buy” to “Hold” and lowered his one-year price target on the stock from $22.50 to $17.00, implying a return of 10.7 per cent at the time of publication.

Maruoka thinks Medical Facilities Corp will generate EBITDA of $105.9-million on reveneu of $378.4-million in fiscal 2017. He expects the company will post EBITDA of $113.9-million on a topline of $375.9-million the following year.