Still more upside to come from Medical Facilities, says iA Capital

The vitals for Medical Facilities Corporation (Medical Facilities Corporation Stock Quote, Chart, News TSX:DR) are still looking good to iA Capital Markets analyst Chelsea Stellick, who maintained a “Buy” rating while raising her target price from C$11.75/share to C$12/share and projecting a return of 12.1 per cent in an update to clients on Thursday.

Incorporated in 2004, Medical Facilities Corporation 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 an ambulatory surgery centre, which performs scheduled outpatient surgical procedures.

Stellick provided her latest analysis after Medical Facilities announced its fourth quarter financial results, along with 2021 year-end figures.

“Q4 is a seasonally strong quarter for MFC and Q4/21 results handily beat Street estimates for both revenue and EBITDA resulting in an upward rerating of the stock this morning,” Stellick explained.

The company’s financial quarter was headlined by $116 million in revenue (all reporting figures are in US dollars), presenting a six per cent year-over-year increase while beating the estimates set by both the consensus ($107 million) and iA Capital Markets ($109.9 million), though Stellick noted the beat also included $5.7 million from a government stimulus package compared to $2.7 million in the same quarter of 2020.

The company’s adjusted EBITDA report of $32 million also provided a beat, as the consensus projected $27 million for the quarter while iA Capital Markets projected $28.6 million. The figure also represented a 12.4 per cent year-over-year increase.

Medical Facilities ended the quarter with $11.6 million in cash available for distribution, up from the $7.8 million reported in the same quarter of 2020.

“We had a solid fourth quarter to cap a much-improved year compared to 2020,” said Robert O. Horrar, President and CEO of Medical Facilities in the company’s March 10 press release. “Surgical case volumes continued to approach pre-pandemic levels, despite COVID-19’s effects on staffing and scheduling of cases. Our strong cash flow performance throughout the year translated to improved shareholder returns in 2021, including substantial share price appreciation, a higher dividend, and the repurchase of 310,000 common shares in the fourth quarter. Our balance sheet remains strong, and we are well positioned to capitalize on growth opportunities.”

In addition to its $2.1 million purchase of its own shares from the market, the company closed an underperforming BHSH urgent care centre which Stellick estimates will result in a $1.6 million annual revenue loss but no loss of EBITDA.

With staffing challenges related to the Omicron wave of COVID-19 serving as a catalyst, the company’s salaries and benefits amounted to 27.3 per cent of the company’s revenue (previously 27.7 per cent), drugs and supplies increased from 31.9 per cent to 32.1 per cent, general and administrative expenses dropped from 14.4 per cent to 13.2 per cent, and total operating expenses dropped from 80.3 per cent to 78.1 per cent.

The updated quarterly results have prompted revisions to Stellick’s financial projections. After wrapping up 2021 with $411.7 million in revenue, Stellick projects a modest, yet more pronounced step forward in 2022 with a new forecast of $434.1 million (previously $427.4 million), implying a year-over-year increase of 5.4 per cent. Looking ahead to 2023, Stellick has lowered her projection to $438.3 million (previously $444.7 million), suggesting a year-over-year increase of roughly one per cent.

Stellick’s adjusted EBITDA projections get a similar tune-up, as she now forecasts $106.7 million in adjusted EBITDA for 2022 (previously $104.9 million) for an implied margin of 24.6 per cent, while lowering her 2023 estimate to $114 million (previously $115.4 million) for an implied margin of 26 per cent.

From a valuation standpoint, Stellick forecasts minimal movement in the EV/adjusted EBITDA multiple, with a drop from 4.3x in 2021 to 4.2x in 2022, then to 4x in 2023.

Stellick also lowered her overall forecast for returns, changing her 2022 EPS target to $0.75/share (previously $0.77/share) and a P/E multiple of 15x, with a forecasted improvement to $0.96/share (previously $1.03/share) in place for 2023, paired with a P/E multiple of 11.4x.

“Despite Omicron sweeping through the nation in Q4 there has been continued improvement in surgical case volumes and we maintain our outlook for increasingly normalized surgical case volumes and phasing out of stimulus,” Stellick said.

Medical Facilities Corp has been on an upward trend, as its stock has produced a return of 65.5 per cent over the last 12 months, and 24 per cent since the start of 2022. Following the release of the quarterly reports, the stock shot up to a 52-week high of $11.37/share at Thursday’s close.