Medical Facilities Corp

Medical Facilities Corp (TSX: DR) owns a diverse portfolio of surgical facilities in the United States. Through its wholly owned subsidiaries, the company owns controlling interests in four specialty hospitals and six ambulatory surgery centers. The hospitals offer a range of non-emergency surgical, imaging, diagnostic and pain management procedures, and other ancillary services such as urgent care and occupational health.

Why Should Investors Book Profit? 

• Drop in EBITDA, despite higher revenue: In Q2 2021, the company clocked higher revenue, which increased by 10.5% to USD 98.1 million compared to USD 88.8 million in the previous corresponding period. Despite registering higher revenue, the company’s EBITDA fell by 3.7% to USD 23.6 million, while an EBITDA Margin also fell to 24.1%V/s 27.7% in pcp.
• Stretched Valuation: DR shares are available at an NTM P/E multiple of 10.4x compared to the industry (Healthcare Providers & Services) average of 1.9x. This implies that the shares are highly overvalued against the industry.
• Higher Leverage: The company’s debt to equity ratio at the end of June 2021 stood at 1.37x, higher than the industry median of 0.64x. Additionally, it’s % LT Debt to Total Capital stood at 44% whereas industry median is of 25%. These factors imply higher balance sheet risks.
• Technical Indicators are suggesting potential price consolidation: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger Bands®, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~73.92 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group

Stock recommendation

In Q2 2021, the company recorded volume recovery as it neared pre-pandemic levels and clocked higher revenues, which increased by 10.5%. Still, its operating income and EBITDA fell. EBITDA margin stood at 24.1% v/s 27.7% in pcp. Additionally, the stock is trading on highly stretched valuation and the company has higher leverage along with higher % LT Debt to Total Capital than the sector median, indicating significant balance sheet risk. Moreover, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale, we recommend a “Sell” rating on the stock at the closing price of CAD 9.45 on August 25, 2021.

*The reference data in this report has been partly sourced from REFINITIV

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