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Medical Facilities is a Buy, says iA Capital

Chelsea Stellick of iA Capital Markets is staying positive on Medical Facilities Corporation (Medical Facilities Corporation Stock Quote, Chart, News TSX:DR), maintaining a “Buy” rating while raising her target price from C$11.10/share to C$11.75/share to project a return of 24.7 per cent in an update to clients on Thursday.

Incorporated in 2004 and headquartered in Toronto, Medical Facilities owns and operates specialty surgical hospitals in the United States which provide surgical, imaging, diagnostic, pain management procedures and other ancillary services. The company also operates ambulatory surgery centres which perform scheduled outpatient surgical procedures.

Stellick provided her latest analysis after Medical Facilities announced its third quarter financial results, which Stellick noted to largely be in line with projections.

The company’s financial reports were headlined by revenue of $99 million (all report figures in US dollars except where noted otherwise), coming in slightly below the iA Capital Markets estimate of $99.6 million and the consensus forecast of $99.8 million. Stellick also noted that $2.5 million of the company’s revenue came from government stimulus income compared to $500,000 in the previous quarter.

“While there is no certainty stimulus income will be extended and COVID-19 uncertainty remains, we do not model it going forward,” Stellick said.

Meanwhile, the company’s adjusted EBITDA came in at $23.4 million, a 4.9 per cent year-over-year decrease while also falling short of the iA projection of $23.9 million, as well as the consensus forecast of $24.4 million.

In its official press release, the company attributed the losses to higher share-based compensation plan costs, which come from the strong appreciation of the company’s common shares.

The company also increased its quarterly dividend to $0.0805/share beginning with the next quarter, an increase from its previous rate of $0.07/share.

Stellick noted that the company intends to file an NCIB with the TSX to buy-back up to five per cent of its issued and outstanding shares, which would be worth approximately $15 million at their current price.

Stellick also said she believes the company will shift its focus to developing new de novo ASCs, with each new ASC requiring around $3 to $5 million to generate income between $500,000 and $1 million in cash available for distribution annually.

She also noted that the company is under-leverage with $63 million in cash and debt to 2021E EBITDA of 1x, representing a significant discount to the peer group, which sits at 5.3x. The company’s liquidity continues to improve with each quarter, with a lower payout of 30 per cent.

“While our case volumes have not fully returned to pre-pandemic levels, we are pleased with our solid financial results over the first nine months of 2021,” said Robert O. Horrar, President and CEO of Medical Facilities in the company’s November 11 press release. “Not only have we successfully weathered the pandemic to date, but we also continued to improve our financial flexibility, having reduced our debt significantly over the past two years.”

The new report from Medical Facilities prompted Stellick to revise her financial estimates for the company, as she has modified her revenue projection for 2021, slightly lowering the figure from $405.8 million to $408.2 million, while also modifying her 2022 projection to $427.4 million from $427.7 million.

Meanwhile, Stellick’s revisions still have Medical Facilities reaching nine figures of adjusted EBITDA, though the $100.8 million revision is slightly below the previous estimate of $101.3 million, while the impact on 2022’s EBITDA is minimal at $104.9 million compared to the initial $105 million.

Stellick’s valuation data also presented Medical Facilities in a positive light, as she projected the company’s EV/adjusted EBITDA to drop to 4.2x in 2021 before another projected dip to 4x in 2022, while the P/E multiple shows more drastic movement, with Stellick projecting a drop from the reported 34.5x in 2020 to a projected 22.4x in 2021, then again to 12.8x in 2022.

“Despite a surge in COVID-19 cases across the United States in Q3, there has been a strong rebound in surgical case volumes, and we maintain our outlook that we will see a continuation of normalized surgical case volumes going forward which will more than offset declining stimulus income,” Stellick said. “With $63 million cash on hand, the company remains poised to deploy capital in de novo ASC developments coming out of the pandemic to gradually diversify and scale its portfolio.”

Medical Facilities Corporation’s stock price has proven to be a healthy investment in 2021 with a return of 38.8 per cent for the year, enjoying particular momentum with 41.8 per cent growth in the stock price since June 15, eventually hitting a high point of $10.00/share on September 7.

About The Author /

Geordie Carragher is a staff writer for Cantech Letter
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