Medical Facilities Corp ($DR.TO) ($MFCSF) 22Q4 Update
Medical Facilities Corp (TSX: DR) (PNK: MFCSF) is currently priced at a 3.75x EV/EBIT following its 2022Q4 financial results which were reported before open yesterday. @3.75x you might think, is this company a cyclical, is it in financial trouble? Nope and nope. In fact it has a strong underlying business, management even bought back 16% of the company's shares in 2022, and have continued to buyback throughout 2023 so far.
Don't get me wrong, this company has some problems:
Sequential declines in income from operations due to increased expenses
Dividend cut, alienating its investor base
Multiple write-downs due to several under performing assets
At 3.75x...perhaps the problems are more than priced-in already? What is management doing about these problems, are they fixable? This could turn out to be a really good investment if they are, I mean, at this valuation, they may not even have to fix them, just stopping them from getting worse might do the trick.
To answer the question, I'll begin by noting that the corporation is not sitting idly by. The Company overhauled its board, replaced its CEO in Fall 2022 and announced a new corporate strategy:
pursue overhead cost reductions; and
evaluate and implement strategies to return capital to its shareholders, including the commencement of a substantial issuer bid.
suspend acquisitions;
divest its non-core assets;
Execution of Corporate Strategy
From the 2022Q4 Conference Call:
Expenses
Of primary concern has been expense growth pressuring operating margins. (I'll get to the impairment charges later)
when adjusted for the impact of the impairment charge and the reversal to PPP income, our income from operations was $22.3 million and adjusted EBITDA was $27.6 million for the quarter.
In comparison, in Q4 2021, we had income from operations of $25.5 million and adjusted EBITDA of $32 million
Labor Expense Growth
Labor is the largest component of cost growth.
consolidated salaries and benefits were up 6.1% over Q4 2021. Contributing to this was a combination of annual merit increases, full-time equivalent increases and market wage pressures due to the shortage of nurses as well as the separation costs for our previous CEO.
Labor Expense Relief
All is not lost, there are silver linings, reasons to be cautiously optimistic that management has some levers to pull, and that the labor market is beginning to show signs of stabilizing.
The nursing shortage existed pre COVID. COVID exacerbated that problem. So it continues into 2023. Things are improving somewhat. There's a little bit of less pressure. There's not as much requirement for signing bonuses and stay bonuses and things like that. So overall, we are seeing improvement. But there's going to be a continued shortage, and we'll just have to maintain our competitiveness in those markets.
The CEO along with his salary and benefits in the range of $1.9m was a labor expense also...
During the quarter, we concluded a separation agreement with MFC's former CEO, and this combined with the retirement of our former COO, will result in significant savings in salaries and benefits on a prospective basis
Overhead Cost Reductions
Interim CEO on overhead cost reductions - sounds like early days still.
We're always looking at opportunities to reduce expenses. So we've -- we engaged in that in the latter part of Q4 of 2022, and we're going to continue that process into 2023.
We continue to pursue opportunities to reduce expenses, including overhead cost reductions.
Capital Returns to Shareholders
3.1 million shares at an aggregate purchase price of $25.5 million. Additionally, under our NCIB program, we purchased 433,300 shares at an aggregate purchase price of $2.5 million. Combined, we purchased just under 4.9 million shares or about 16% of our total shares in 2022,
the fundamentals remained strong in our 4 hospitals. In the quarter, we generated cash available for distribution totaling CAD 9.9 million resulting in a payout ratio of 21.2%.
Effect of buybacks on cash & working capital:
At the end of December, we had consolidated net working capital of $32.5 million, including $34.9 million of cash and equivalents. This compares to working capital of $60.9 million, including cash and equivalents of $61 million at the end of 2021.
Suspension of Acquisitions & Divestiture of Non-Core Assets
Every quarter Medical Facilities Corp has been writing down impairments for its loan receivable associated with its Unity Medical and Surgical Hospital (UMASH) stake. It's nice to finally get this bad asset off the books, and even nicer to get something in return for it.
In December, we sold our remaining 31.7% interest in Unity Medical and Surgical Hospital and settled the associated loan receivable for gross proceeds of $2 million.
Next non-core asset in their divestiture queue racking up impairments - MFC Nueterra ASCs.
We recorded a noncash impairment charge of $16.5 million related to the continued underperformance of the MFC Nueterra ASCs. This was a noncash item. It is important to highlight that these ASCs do not contribute materially to our results.
Question:
is it still on the table, the noncore divestments and any kind of developments you can talk in there?
& Answer:
So that's still definitely on the table. That was one of our stated goals that we mentioned back in Q4 of last year. That's still on the table
Righting the Ship
If fixing the operating income means fixing the stock price, a path to doing so becomes paramount. If cutting costs helps to right the ship, so does top line growth...
I would say, in general, the facilities are going to continue looking to expand on the top line growth that they saw in 2022. Yes, we will see some of the pricing pressure slow down a bit than what we've seen over the past year. So there's certainly an opportunity for improvement.
Revenues
Our facilities service revenue reached an all-time high for the quarter due to a more favorable case in payer mix, combined with a 5.7% increase in surgical volumes at our 4 specialty surgical hospitals
Facility service revenue for the quarter increased 7.9% to $119.4 million compared to Q4 2021.
our combined case volumes increasing 5.7% compared to the fourth quarter of the year before and 1.5% when compared to the fourth quarter of 2019
Total revenue and other income decreased by $9.3 million to $107.1 million for the quarter. The 8% decrease was primarily attributable to a reduction in government stimulus income driven by the onetime reversal of $12.3 million in PPP income recognized in prior years
Debt
At year-end, we had $36 million outstanding in our corporate credit facility, and a $12.3 million reversed from government stimulus income was reported as a liability under payer advances and government stimulus funds payable. Any PPP loans subsequently forgiven will result not only in recognition of income but also a reversal of the corresponding liability.
Conclusion
Medical Facilities Corp continues to have potential for multi-bagger upside, with limited downside.
How do you handle the NCIs payments (non controlling interest) in terms of valuation. Are those already handled in your given multiples.
It's a rather confusing part in their numbers as they seem to use them as a non cash item . They are so transparent about PPP and stuff but this is rather confusing . I am not sure if they should be excluded , and if not valuation is at least more expensive than the numbers show !
This is an interesting one! Done a little work myself. I'm wondering if their metric "Cash available for distribution" is better to look at than any other metric since it seems like minority interests take a chunk of the cash and they have a bunch of non-cash things going on. They generated ~ CAD $28M in the TTM, for a current P/CAFD of around 7x. That's still pretty cheap, but not as cheap as EV/EBITDA would lead us to believe.
I also wonder about their ability to actually reduce cost inflation while staying competitive. Seems like that would have to happen for this to get a bid. Any thoughts?