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.
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?
Hi Stephen, thanks for your comment. Fundamentals have continued deteriorating a little bit, it's revalued to a whopping 5x EV/EBIT, . So it's still priced for imperfection, which is why I like it. While it's been dealing with all kinds of inflation, the pressure is easing on the labour front. 1/3 of their drug costs are negotiated on multi-year deals, so lots of room to improve on costs come contract renewal, and 2/3 still uncontracted...just not immediately, most investors aren't patient enough to reep these kind of rewards. It just feels too cheap to me. Cost pressures aren't specific to Medical Facilities it's industry wide, long term, the sector likely isn't going to zero profitability. Plus the adult supervision has taken over this company, old CEO and his $2m salary has been pushed out, the capital allocation is focused on buybacks, at current valuation that's where it should be. I suspect they will find more levers to pull. Nevertheless, under the status quo, they're spending 2/3rds of their cash available for distribution to reduce shares by 0.5% per month, plus payout a 4% Divy. I can live with that while I wait for better times ahead.
Thanks for the reply, learned a bit more. I think it's pretty telling that CAFD is down slightly from last year but on a per share basis up. Kind of representative of the value.
Don't love how the Gross margin has been in steady decline for a while. Definitely priced in but still causes hesitation. Analysts seem to think management can actually expand EBITDA margins. Would be interesting to talk to management.
Overall interesting stock, will require more work. Thanks.
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?
Hi Stephen, thanks for your comment. Fundamentals have continued deteriorating a little bit, it's revalued to a whopping 5x EV/EBIT, . So it's still priced for imperfection, which is why I like it. While it's been dealing with all kinds of inflation, the pressure is easing on the labour front. 1/3 of their drug costs are negotiated on multi-year deals, so lots of room to improve on costs come contract renewal, and 2/3 still uncontracted...just not immediately, most investors aren't patient enough to reep these kind of rewards. It just feels too cheap to me. Cost pressures aren't specific to Medical Facilities it's industry wide, long term, the sector likely isn't going to zero profitability. Plus the adult supervision has taken over this company, old CEO and his $2m salary has been pushed out, the capital allocation is focused on buybacks, at current valuation that's where it should be. I suspect they will find more levers to pull. Nevertheless, under the status quo, they're spending 2/3rds of their cash available for distribution to reduce shares by 0.5% per month, plus payout a 4% Divy. I can live with that while I wait for better times ahead.
Thanks for the reply, learned a bit more. I think it's pretty telling that CAFD is down slightly from last year but on a per share basis up. Kind of representative of the value.
Don't love how the Gross margin has been in steady decline for a while. Definitely priced in but still causes hesitation. Analysts seem to think management can actually expand EBITDA margins. Would be interesting to talk to management.
Overall interesting stock, will require more work. Thanks.