Steady-State EPS ForecastI built a forecast of EPS assuming they can operate at capacity again but get hurt by receiving in-network rates.
Worst case: (35% haircut on rates across 100% of their business volumes) EPS would be approx Cdn$0.53, cash flow Cdn$0.74 which is after deducting a non-controlling interest in income (NCI) of Cdn$0.35 per share.
Alternate Case: (15% haircut on rates assuming less than 100% of volumes go in-network) EPS would be approx Cdn$1.08, cash flow Cdn$1.34 which is after deducting NCI of Cdn$0.66 per share.
My conclusion: Worst case cash flow for one year equals today's stockprice. Therefore I am not selling my shares. Biggest risk (other thanresolving the disputes and claims) is they are unable to get back tocapacity volumes. I am not expert in valuing stock prices ... you candecide what you are willing to pay. P/E somewhere between 5x and 15xseems to be typical but they first need a track record of delivering.
Assumptions: Capacity revenue = 1Q/2008 revenue grossed by 11% to adjust for the Kirby revenue falloff since 2007 (based on comparing 2Q/2008 to 2Q/2007 pro-forma). Then multiply by 4. Then add US$1.4M for 4Q seasonality. Equals US$50M full-year.
In-Network haircut: Per my Google search, I found in-network rates are 65%-72% of HOPD rates (hospital out-patient department). I suspect ASC out-network rates are lower than HOPD rates because the attractions of ASCs is they are supposed to be less expensive than hospitals and give better service. If true, then the haircut is less than 35%. Haircut to revenue falls straight to pre-tax income and cash flow, but of course NCI shares the pain.
Expenses: Salaries, G&A etc equal 1Q/2009 x 4. F/X hedging gains/losses, bad debts, NCI-FMV-change all zero. Tax rates are at 1Q/2008 rates. Cash flow = After tax income and add back depreciation and deferred tax.
NCI: 36.5% of income from operations before tax (based on 2007 and 2008 actuals). I assumed any added equity to new partner doctors would be offset by Kramer selling down his 12.5% stake in the umbrella holding company. Who pays what to whom and what happens to claims against the insurance company for overdue A/R is assumed to be neutral to long-term profitability so I ignored it.
F/X rate: I used $0.85 (Friday closed at about 0.89). I assumed they close out their hedges when the F/X rate gets to 0.92 at which point they can escape for free going forward. Assume future F/X risk management is done by the shareholder.