Medical Facilities Corp is a buy, says Echelon Wealth

Specialty surgical service company Medical Facilities Corporation’s (TSX:DR) fourth quarter came in both strong and in-line with expectations from analyst Douglas Loe of Echelon Wealth Partners who in a client update on Friday maintained his “Buy” rating and C$18.25 target price.

In its Q4 and year ended December 31, 2017, financials, Medical Facilities posted revenue bumps of 3.0 per cent for the quarter (to $111.3 million (all figures in US dollars unless otherwise noted) from $108.0 million) and 13.5 per cent for the year (to $385.3 million from $339.5 million).

The US-based operator of specialty surgical hospitals and ambulatory surgery centres saw outperformance of the company’s Sioux Falls, South Dakota, hospital, says Loe, which generated 25.6 per cent year over year growth in operating income ($15.3 million compared to $12.2 million last year), which covered year over year declines in operating income across other facilities within the company’s network.

“MFC has frequently experienced geographically-diverse operating performance and we could see Sioux Falls out-performance as a positive offsetting element in MFC’s hospital portfolio that did hold firm on an EBITDA level that was still historic high if not quite to FQ415 ($44.7M) or FQ413 ($33.1M) levels,” says the analyst.

DR’s annual dividend payout is staying at C$1.13 per share, with Loe arguing that there is minimal risk to the company’s current policy.

“We continue to believe that operational excellence across MFC’s hospital/ASC portfolio, and the consolidated EBITDA it generates that remains strong in our view in absolute terms even as margin trends lower, gives us confidence that dividend policy is safe and that the firm can prudently deploy free cash into new ASC acquisitions, as it did with the seven-facility JV with NueHealth earlier in FQ1/18,” the analyst says.

Loe thinks that DR will produce revenue in 2018 of $405.9 million and EBITDA of $101.4 million with an EPS of $1.55.

The analyst bases his $18.25 target price on the average of three methods, namely, multiples of his adjusted AFFO, EPS and EBITDA forecasts. The target represents a projected one-year return of 26.1 per cent and a total return of 33.9 per cent including dividend yield of 7.8 per cent.