Medical Facilities Corp. is a buy, Echelon Wealth’s Doug Loe says

Medical Facilities Corporation (TSX:DR) posted a stable profit in its fiscal second quarter, says analyst Douglas Loe of Echelon Wealth Partners, who in a Thursday note to clients maintained his “Buy” recommendation and C$18.25 price target.

Medical Facilities, which owns and operates surgical facilities in the United States, yesterday announced its financial results for the three and six-month periods ended June 30, 2018. For the quarter, the company saw its EBITDA increase by 3.4 per cent from a year earlier to $23.9 million on total revenue of $106.5 million, up 10.8 per cent from Q2 of last year. (All figures in US dollars unless noted otherwise.)

“Our second quarter results underline the significance of our acquisition of seven ambulatory surgical centres through MFC Nueterra in the first quarter,” CEO Robert O. Horrar said a press release. “The MFC Nueterra [ambulatory surgical centres] drove higher case volumes and accounted for most of the revenue growth of 10.8 per cent for the second quarter. Expanding our footprint to 11 states from five, MFC Nueterra’s strong contributions to date further validates our strategy to diversify our portfolio.”

DR’s quarterly revenue came in modestly ahead of the consensus expectation of $103.1 million, while income from operations of $13.1 million or 18 cents per share beat the Street’s expected 14 cents per share.

Loe says Q2 continued Medical Facilities’ long-standing theme of gradually evolving EBITDA margin compression, an operational factor on which he says the company needs to focus going forward. Overall, the quarter met his expectations for generating sequential growth and annualized stability by all income statement measures.

“We continue to believe that core hospital operations even without new (and importantly, accretive) ambulatory surgical centres operations can adequately fund current dividend policy,” he writes. “We believe the firm can profitably augment operations through acquisitions or other growth capex initiatives, as it has throughout its corporate history, but there is still modest growth potential just from driving new out-patient procedure volumes at Neuterra and by lifting Unity Medical operations up to its own average operational standards in coming quarters.”

The analyst thinks DR will generate EBITDA of $98.8 million in 2018 on revenue of $412.5 million. His C$18.25 target represents a projected total return including dividend yield of 29.7 per cent at the time of publication, with a dividend yield of 7.5 per cent.