TD maintains Buy rating and $16.50 Price Target Event
MFC's Q2/18 results and commentary were highlighted by strong
performances at Sioux Falls (SFSH) and Black Hills (BHSH), with an offsetting
drag from the Unity Medical (UMASH) and Arkansas (ASH) facilities. In addition,
the newly acquired Nueterra ASCs contributed ~$9.6mm to quarterly revenues.
Q2/18 revenue grew 10.8% y/y to $106.5mm vs. the TD estimate of $104mm.
Corporate EBITDA of $23.9mm compares to the TD estimate of $24.7mm. The
Q2/18 payout ratio was 74.3%. As of June 30, 2018, MFC had $37.2mm in cash and
$167.9mm in debt, with net debt/EBITDA of ~1.3x.
Impact: MIXED
Positives
The Dakotas Look Strong — SFSH and BHSH revenues grew 5% and 7.4%
y/y, driven by case volume and favourable case mix. These are MFC's largest
facilities contributing 48% of overall revenues. Recent performance appears to
counter competition concerns in their respective markets.
Nueterra's Arrival - Nueterra contributed ~$9.6mm in revenues in its first full
quarter under the MFC banner. In the medium term, we expect Nueterra to
deliver ASC management expertise, cost efficiencies, and business development
leverage. Nueterra will also contribute critical diversification - raising MFC's ASC
exposure to 11% of revenues and broadening its base by six states.
Constraints
UMASH Turns Profitable but Remains on the Watchlist — UMASH's operating
income turned marginally profitable in Q2/18. Management continues to focus on
physician recruitment at the facility and we anticipate improvement in H2/18. Key
challenges include capacity underutilization and high revenue concentration.
TD Investment Conclusion
We are maintaining our BUY rating and C$16.50 target price. MFC continues to
leverage its competitive positioning and secular fundamentals to capitalize on highmargin
procedures. Despite quarterly lumpiness, MFC's annual revenue showed
consistent growth. MFC's return to our $16.50 target price has narrowed on today's
trading activity. We are nonetheless maintaining our BUY rating in anticipation of the
stock settling to more sustainable levels in the immediate term.