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Zacks initiates coverage of University General Health System with an Outperform rating
Steven Ralston, CFA
Zacks has initiated coverage of University General Health System : OTCQB) with an Outperform rating and a target of $0.58. University General Health System is a multi-specialty health care provider that owns and operates a regional healthcare network in the Houston metropolitan area. The network is comprised of a core hospital and several complementary healthcare facilities, including eight hospital outpatient departments (HOPDs), one ambulatory surgical center (ASC) and three senior living facilities. Management is executing an aggressive growth plan to acquire additional facilities, further developing the company’s footprint in Houston. The company’s business model consists of the delivery of concierge, patient-oriented care by motivated physicians which currently own over 46% of the company.
Management’s strategic growth plan entails the creation and operation of regional health care networks developed around general acute-care host hospitals in other metropolitan areas, replicating the process employed in Houston. Each network is anticipated to be built through the acquisition of a host hospital and ancillary healthcare facilities within a radius such that they can operate under the hospital’s licenses as HOPDs. Each locally concentrated system would consist of a core hospital, along with HOPDs, ASCs, procedure facilities, diagnostic imaging centers, physical therapy clinics, among others. By consolidating health care providers into HOPDs, the University General network will benefit from higher reimbursement rates. In addition, the company’s physician-centric model allows the network to capture incremental revenues for procedures referred within the system. Initially, management plans to expand geographically within Texas.
During 2011, the University General acquired three senior living facilities, a support services organization that provides billing and other administrative services (Autimis) and a luxury hospitality service provider and facility management company (Sybaris). In addition, the company acquired 51% of the support services company that manages six senior living facilities and 15% of Mainland Surgery Center. So far in 2012, University General has acquired the Baytown Endoscopy Center, 1960 Digital Imaging (a diagnostic imaging and physical therapy center), three clinics (diagnostic imaging, physical therapy and sleep) located at the Kingwood Diagnostic and Rehabilitation Center and the Robert Horry Center for Sports and Physical Rehabilitation Center. University General Health System is expected to continue acquiring ancillary healthcare facilities in the Houston area in order to help fill out in its health care network, including free-standing emergency rooms, ambulatory surgical centers, diagnostic imaging centers, physician practices, post-acute skilled nursing facilities (SNFs) and other complementary facilities.
Through acquisitions and organic growth, total revenues increased 29.2% in 2011 to $72.5 million. Continuing the trend, during the first half of 2012, total revenues advanced 44.5% to $48.2 million over the comparable first half of last year. The company is also reporting double digit increases in the average daily inpatient census at University General Hospital.
Our price target of $0.58 is based on price-to-sales (P/S) and enterprise value-to-EBITDA (EV/EBITDA) valuation methodologies. University General is a small-capitalization company with a revenue profile that should experience rapid growth both through internal growth as the company’s hospital network is better utilized and through the execution of management’s aggressive acquisition strategy. The growing revenue stream has already manifested itself into positive earnings in the second quarter of 2012. Based on historical norms for similar specialty providers of hospital-related services companies, we expect UGHS to trade in an EV/EBITDA valuation range between 9.3 and 6.0, and specifically, our target is based on UGHS attaining the first quartile valuation benchmark of an 8.5 EV-to-EBITDA ratio due to the positive news flow of the successful implementation of management’s growth strategies. Also, valuation based on the price-to-sales metric confirms and reinforces the $0.58 price target. We expect UGHS to trade in a P/S valuation range between 2.0 and 1.0, which is also based on historical valuations of similar companies. The first quartile P/S valuation benchmark is 1.8 or $0.58 per share. Given management’s stated business plan of becoming a creator, owner and operator of regional health care networks in multiple metropolitan areas, University General is expected to expand its revenue base and level of profitability significantly.
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