Robust financial results over a typically weaker quarter are good cause for a target raise on Medical Facilities Corp (Medical Facilities Corp Stock Quote, Chart, News, Analysts, Financials TSX:DR), according to IA Capital Markets analyst Chelsea Stellick. The analyst delivered a research report to clients on Thursday where she kept her “Buy” rating but raised her price target from C$8.60 to C$8.90 per share.
Medical Facilities owns controlling and non-controlling interests in four specialty surgical hospitals and eight ambulatory surgical centres in the United States. Specialty surgical hospitals, which perform scheduled surgical, imaging, diagnostic and other procedures, derive their revenue from fees charged for the use of their facilities, while ambulatory surgical centres (ASCs), which specialize in outpatient surgical procedures, with patient stays of less than 24 hours.
The company announced its first quarter 2021 results on Thursday, showing revenue up 5.8 per cent to $98.1 million, including government stimulus income of $4.1 million. Adjusted EBITDA for the quarter jumped 35.4 per cent to $25.1 million. (All figures in US dollars except where noted otherwise.)
“We are pleased with our first quarter results as case volumes continue to normalize to pre-COVID-19 levels,” said Robert O. Horrar, President and CEO, in a press release. “As vaccines continue to roll out, we remain optimistic on our outlook for 2021. We have a strong balance sheet and are well-positioned to take advantage of the right growth opportunities.”
MFC saw weaker quarterly numbers over 2019 which helped bring the stock down from the $17.00 level to $4.00 and change at the start of 2020. But the company picked it up over the past year and a bit, in part by divesting some assets and strengthening its balance sheet, and the change was felt in the share price, which grew by 47 per cent last year.
For 2021, MFC has been essentially flat, but Stellick sees upside ahead. On the Q1 numbers, the company’s revenue and EBITDA of $98 million and $25 million, respectively, beat Stellick’s forecast at $92 million and $18.3 million, respectively, and the consensus call for $92 million and $13.0 million, respectively.
Stellick said MFC’s facility service revenue is driven directly by the number and type of cases performed, while for the quarter, that revenue grew 1.3 per cent year-over-year due to higher portions of orthopaedic and spine procedures along with a higher percentage of Blue Cross/Blue Shield and lower Medicare cases.
“Outpatient cases increased by 2.6 per cent and observation cases increased by 15.4 per cent, while, overall, total surgical cases remain consistent as this was offset by a decrease in inpatient cases of 15.1 per cent,” Stellick wrote.
“We expect MFC to prioritize multiple de novo ASC developments in 2021 and 2022, with each new ASC requiring around $3-5 million to generate income of $0.5-1.0 million in cash available for distribution annually. We look for capital deployment initiatives in H2/21,” she said.
Stellick pointed out that Medical Facilities, which currently has a dividend yielding about 3.8 per cent, saw cash available for distribution drop year-over-year by C$0.9 million to C$7.9 million due mainly to the relative strength of the Canadian dollar, the analyst said, while distributions per share at C$0.07 remained consistent year-over-year and translated to a payout ration of 27.6 per cent.
Stellick said MFC’s current state of affairs leaves it with a number of options.
“In the last two years, MFC decreased its dividend and divested underperforming assets, resulting in its current under-levered balance sheet with $58 million in cash and debt to 2021E EBITDA of 1.9x versus 5.6x for peers,” Stellick wrote. “Liquidity improves each quarter due to the very low payout ratio of 20-30 per cent. Rather than accumulate cash, we believe that sooner or later MFC will increase dividends, buy back shares, develop new de novo ASCs, acquire existing facilities, or some combination thereof.”
“Given MFC’s excess liquidity, the Company is poised to deploy capital in de novo ASC developments coming out of the pandemic to gradually diversify and scale its portfolio,” she wrote.
Going forward, Stellick is calling for Medical Facilities to deliver 2021 revenue and adjusted EBITDA of $401.5 million and $92.9 million, respectively, and 2022 revenue and EBITDA of $420.4 million and $89.4 million, respectively. At the time of publication, the analyst’s new C$8.90 target represented a projected one-year return of 25.8 per cent.
“We calculate our target price by using a 6.0x EV/EBITDA multiple on our 2021 EBITDA forecast after adjusting for non-controlling interest,” Stellick wrote. “This multiple is substantially lower than peers due to MFC’s significantly smaller size and the associated concentration risk. We are raising our target price to C$8.90/share on account of the strong Q1/21 results.”