National Bank upgrade...Medical Facilities Corporation Increasing Target as Peer Valuation Expands DR (TSX) STOCK RATING TARGET EST. TOTAL RETURN C$7.05 Outperform (Unchanged) C$7.75 (Was C$6.75) 13.9% Maintain Outperform Post-Q3/20 upgrade drivers still relevant Following strong Q3/20 results, we upgraded DR to Outperform as, in our view, the company appears to be at an inflection point with 1) nonperforming assets largely divested throughout 2020; and 2) an improving EBITDA margin (+50 bps y/y in Q1/20 and +133 bps y/y in Q3/20 whereas Q2/20 was heavily impacted by the pandemic). Additionally, 1) DR’s volumes continue to normalize in Q4/20 despite some of its hospitals operating in a highly impacted COVID-19 (C-19) state (South Dakota); 2) there is potential for incremental volumes over the next few quarters as DR, which does not treat C-19 patients, picks up surgical cases from other hospitals that do handle C-19 patients; and 3) the company will likely continue opening new ambulatory surgical centres (one opened in Q3/20) to increase its footprint. Target to $7.75 (was $6.75); Maintain Outperform In addition to the improving outlook, DR also has several positive financial attributes including 1) reasonable leverage of ~2.4x Net Debt to 2021e EBITDA (peers at ~4x); 2) dividend yield of 4% (peers at 0.1%) that is sustainable at a 25% 2021e payout; and 3) inexpensive valuation that at 6.2x 2021e EV/EBITDA stands at a ~39% discount to peers. The latter have seen their valuation increase by 0.6x (to FY+1 EV/EBITDA of 10.1x) since our previous DR update, which implies a gap of 4.1x to our target versus 3.5x previously. The increased valuation differential prompts us to increase our target EV/EBITDA multiple for DR by a similar quantum to 6.5x (was 6.0x), suggesting a new target of $7.75 (was $6.75). The 14% implied return continues to suggest an Outperform rating.