Q4/18 Review - A Positive Quarter
Event
Medical Facilities delivered positive overall performance in Q4/18, with the
Nueterra acquisition and, to a lesser extent, surgical volume growth as the
main growth drivers.
Q4/18 revenue grew 10.8% overall and 1.9% organically y/y to $123.3mm vs. TD/
consensus estimates of $122mm/$117.4mm. Corporate Adj. EBITDA was $32.4mm,
essentially in-line with TD and consensus of $32.8mm and $32mm, respectively. The
company closed the quarter with $36.7mm in cash, $134.3mm in debt, and ~$80mm
undrawn on its credit facility. Net debt/EBITDA stood at 1.3x.
Impact: SLIGHTLY POSITIVE
Broad-Based Volume Growth — Four of Medical Facilities' five legacy specialty
surgery hospitals delivered organic volume growth, driving a 1.9% organic
revenue growth result during the quarter. Q4/18 EBITDA margin performance
came in at 26.3%, down ~250 bps y/y, but up 455 bps sequentially. Y/Y trends
reflect the inclusion of the Nueterra ASC acquisition in Feb. 2018, in addition to
expansion activity at Black Hills (BHSH) and Sioux Falls (SFSH).
Expansion Activity in The Dakotas — Medical Facilities' continued its strategic
expansion of Black Hills (BHSH) and Sioux Falls (SFSH). Included was the
opening of an Urgent Care center in Gillette, Wyoming. In the medium- to
long-term, we expect these facilities to strengthen referral networks; feeding
incremental volume to the surgical hospitals. In the short term, expansion-related
costs dragged Q4/18 EBITDA margins at these facilities by ~550 bps.
UMASH Continues to Improve — UMASH delivered its 3rd consecutive quarter
of sequential growth and its 3rd quarter of EBIT profitability. EBIT margins
improved dramatically — 780bps y/y to 13.9%. To review, UMASH created a
significant drag for the three quarters ended June 30, 2018. The inflection appears
to reflect management efforts to improve capacity utilization.
TD Investment Conclusion
We are increasing our target price to $18.50 from $17.50, and maintaining our
BUY rating. Key considerations include ongoing upgrades at SFSH and BHSH;
improved visibility at UMASH; and strong acquisition prospects.