Medical Facilities Corporation has price target cut at Industrial Alliance

Medical Facilities Corporation (Medical Facilities Corporation Stock Quote, Chart, News TSX:DR) may see reduced volumes at its surgical hospitals and centres as a result of COVID-19, but the longer view still looks great, says Industrial Alliance analyst Chelsea Stellick who provided an update on the stock and company to clients on Monday.

Stellick reaffirmed a “Speculative Buy” rating for DR while dropping the price target from $6.50 to $5.40, indicating a projected 12-month return of 40.2 per cent at the time of publication.

Medical Facilities Corp owns controlling and non-controlling interests in four specialty surgical hospitals and eight ambulatory surgical centres in the United States. The COVID-19 crisis has raised concerns about the likelihood of elective surgeries during the pandemic period but so far MFC’s specialty surgical hospitals are not experiencing any major disruptions.

The company released on April 17 a corporate update vis a vis COVID-19, which reiterated that the US federal government has at this point left the decision on limiting surgeries up to the discretion of the physician-providers as subject matter experts in consultation with patients, and thus, that MFC is proceeding as per usual for the time being.

“Our facilities are screening patients and evaluating on a case-by-case basis which surgical cases can be delayed and proceeding with procedures that, if not provided, would likely result in the need for crisis intervention or heightened disability in our patients,” the statement from MFC read.

Stellick noted that MFC has so far postponed procedures that are “truly elective” and estimates that case volumes are likely going down for quarters two and three this year, with the upside potentially being greater than anticipated activity in the fourth quarter.

“While MFC management does not currently see any particular bottlenecks in its supply chain, or any major disruptions to its surgical procedures considering guidelines on elective surgeries, we do anticipate tempered case volumes in Q2/Q3. However, this could be offset by increased demand in Q4 if patients postpone their procedures until COVID-19 pressures decrease,” Stellick said.

MFC has a partnership with NueHealth for an Ambulatory Surgery Centre in Chesterfield, Missouri, one which Stellick reported is on track for occupancy in June of this year.

“We continue to see this partnership as a positive for MFC as it could provide opportunities for acquisition growth over the next decade as the ASC opportunity in the US continues to grow,” Stellick wrote.

The analyst expanded on the situation in South Dakota, where MFC has about 50 per cent of its revenue coming from two surgical hospitals, saying that authorities estimate it could be another eight weeks for the state to see peak infection rates and that the current supply of hospital beds would be sorely incapable of handling the peak, meaning that specialty hospitals like MFC’s could be tapped for beds. Stellick said that ultimately the impact of COVID-19 on MFC’s operations is still unclear.

“Q4 is seasonally the strongest quarter for MFC as many patients choose to postpone elective surgeries until the end of the year when they have typically maxed out their co-pay fees. While it is too early to tell, patients whose procedures were postponed due to COVID-19 and any bans on elective surgeries may move their surgery dates, could put some demand pressures on Q4/20. Provided that MFC will have capacity to go forward with elective surgeries in Q4, this may bode well for revenues,” Stellick said.