Medical Facilities Corporation has target slashed at Echelon Wealth

A sharp drop in its dividend is cause for a target price reduction on Medical Facilities Corporation (Medical Facilities Corporation Stock Quote, Chart, News TSX:DR), says Echelon Wealth Partners analyst Douglas Loe, who reviewed the company’s latest quarterly results in an earnings update to clients on Thursday.

Toronto-headquartered Medical Facilities owns surgical facilities in the United States including controlling interest in five specialty surgical hospitals, an ambulatory surgery centre in California as well as controlling interest in seven other ambulatory surgery centres through a partnership with NueHealth. The company reported on Thursday its third quarter financials for the period ended September 30, 2019, showing revenue down 2.0 per cent year-over-year to $102.1 million and adjusted EBITDA down 5.4 per cent to $21.4 million. (All figures in US dollars unless where stated otherwise.)

“The challenges we have been facing this year at Unity Medical and Surgical Hospital, or UMASH, continued to affect our results in the third quarter,” said Robert O. Horrar, President and CEO, in a press release. “We continue to evaluate all strategic alternatives for UMASH in order to mitigate the ongoing impact on the company’s results.”

Horrar spoke of the company’s dividend, which reduced its annual payout from C$1.13 per share (which had been the company’s annual dividend since it went public in 2004) to C$0.28 per share.

“We are disappointed in the results over the past few quarters, which has resulted in a payout ratio in excess of 100 per cent. Although the fourth quarter is typically our strongest quarter, the Board of Directors, after deliberate and thoughtful consideration, has concluded that a reduction in the distribution is prudent and in the best long term interest of Medical Facilities. The Corporation believes that the new dividend rate is sustainable given its operations and cash available for distributions. On a pro-forma basis, calculated using the new dividend rate, the 2019 year-to-date payout ratio would have been 42.5 per cent,” Horrar said.

For his part, Loe is maintaining his “Hold” rating on Medical Facilities while dropping his target from C$10.00 to C$5.50, which represented a projected 12-month return of 0.9 per cent at the time of publication.

The analyst says he was “reasonably pleased” with the company’s quarterly numbers, where the $102.1-million top line was close to his $102.7-million estimate. The company’s operating income softness Loe attributed to newly-acquired Unity Medical & Surgical Hospital’s underperformance as well as the operating income contribution from the company’s collaboration with Neuterra.

“A dramatic shift in dividend policy warrants an equally dramatic shift in our DR valuation, but on a more optimistic note, we are encouraged by the fact that conventional income statement and cash flow metrics, though down year-over-year, were not as dramatically down as the year-over-year distributable cash decline and 75 per cent dividend reduction would imply,” writes Loe.

The analyst is now calling for fiscal 2019 revenue and EBITDA of $416.5 million and $88.2 million, respectively, and for fiscal 2020 revenue and EBITDA of $412.9 million and $85.6 million, respectively.