Zacks substantially raises target due to positive surprises in revenues & EBITDA

Zacks substantially raises target due to positive surprises in revenues & EBITDA

By Steven Ralston, CFA

On November 15, 2012, University General Health System ( ( UGHS ) ) reported financial results for the third quarter ending September 30, 2012. Total revenues advanced an impressive 74.4% over the comparable quarter last year to $36.0 million, primarily due to the 15% improvement in the average daily inpatient census at University General Hospital from 40 to 46, which also drove the hospital's average occupancy rate up to 66.7%. In addition, the top-line benefited from the increase in the number of patients from the acquisitions now classified as HOPDs, namely Baytown Endoscopy Center, UGH Diagnostic Imaging and UGH Physical Therapy. Overall, acquisitions this year contributed $5.9 million of incremental revenues to the third quarter. Management attributes the company's robust growth to the successful execution of its physician-centric, integrated health delivery system strategy.

Net patient revenue at University General Hospital increased 71.3% from $18.6 million to $31.9 million despite a significant increase in the provision for bad debt from 1.9% to 9.9% of total net patient revenue as management conservatively elected to reserve a higher rate for bad debt in order mitigate the potential for a year-end adjustment. Moreover, the company’s payer mix improved as the acquisitions were integrated into the University General system as HOPDs. During the quarter, the percentage of net patient revenue from commercial and managed care providers increased year-over-year from 62.8% to 72.6% while the proportion of revenue from Medicare and Medicaid reimbursements declined from 34.0% to 26.6%.

Revenue from Trinity Senior Living increased 14.3% to $2.0 million as the overall occupancy rate expanded to 94.4% versus 87.0% in the comparable quarter last year. Support Services contributed $703 thousand in revenue.

The operating margin expanded 2,023 basis points to 32.5% as operating income increased 362% to $11.7 million compared to $2.5 million in the third quarter of 2011. The company achieved significant operating leverage as management executed on the cost containment strategy which was initially implemented during the fourth quarter of 2011. As revenues advanced 74.4%, operating expenses increased only 34.2%. Notably, salaries, wages and benefits declined to 29.0% of total revenues versus 40% in the comparable quarter of 2011. As a result, EBITDA expanded dramatically by 205% to $14.1 million versus $4.6 million in the third quarter of 2011, and the EBITDA margin increased 1,682 basis points to 39.3%. Below the operating line, the company recorded a noncash charge of $5.7 million related to derivatives due to the company's stock appreciating 91% from $0.22 to $0.42 during the quarter. Net income attributable to common shareholders, which was impacted by the Convertible Preferred C stock dividend for the first time, was $1.96 million or $0.01 per share compared with $1.05 million or $0.00 per share in the comparable quarter last year.

We expect management to continue to pursue its accretive acquisition strategy in Houston and at some point into other metropolitan markets within Texas. The most recent acquisitions (the three clinics at the Kingwood Diagnostic and Rehabilitation Center and the Robert Horry Center for Sports and Physical Rehabilitation Center) are expected to contribute $7.5 million in incremental revenue and $2.6 million in EBITDA during the first year within the University General system.

We reaffirm our Outperform rating, and substantially raise our price target to $0.90, which incorporates the significant positive revenue and EBITDA surprises into our valuation models, which are based on the company attaining first quartile valuation metrics of price-to-sales and enterprise value-to-EBITDA.


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