University General acquires another complementary healthcare facility
By Steven Ralston, CFA
Late last week, University General Health System () announced the acquisition of a sleep and imaging center from Jacinto Medical Group. The Jacinto Sleep and Imaging Center is located in Baytown, a suburb of Houston, and augments the services provided by University General Hospital in general and particularly deepens University General’s HOPD (Hospital Out Patient Department) presence in Baytown. Management expects the newly acquired facility to add more than $5 million in annual revenue and an estimated $1.6 million in adjusted EBITDA during the first year within the University General system. This is another example of management pursuing its accretive acquisition strategy. Adding facilities as HOPDs to University General’s health care system has multiple benefits.
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First, HOPDs drive incremental revenue growth. For example, in the third quarter ending September 30, 2012, recently acquired HOPDs (including Baytown Endoscopy Center, UGH Diagnostic Imaging and UGH Physical Therapy) contributed to an impressive 74.4% year-over-year increase in total revenues. Overall, these acquired facilities added $5.9 million of net patient service revenue in the third quarter of 2012, enhancing the revenue growth at the company’s core hospital.
Second, the addition of HOPDs into University General’s system drives economies of scale. The company achieved significant operating leverage in the third quarter of 2012 reflecting both the company’s growing scale and management’s cost containment initiative. Operating expenses increased only 34.2% versus the 74.4% revenue advance. Notably, as a percentage of total revenue, salaries, wages and benefits declined to 29.0% of total revenues in the third quarter of 2012 versus 40.0% in the comparable quarter of 2011. As a result, the operating margin more than doubled year-over-year (up 2,023 basis points) to 32.5% and operating income increased 362% to $11.7 million compared to $2.5 million in the third quarter of 2011.
Third, HOPDs help increase the average daily inpatient census at University General Hospital. These facilities often refer patients to the hospital, which acts as the hub in University General’s system of healthcare facilities. Average daily inpatient census increased 15% in the third quarter, some of which was attributable to the recently acquired HOPDs.
Fourth, the integration of HOPDs improves the company’s overall payer mix, since HOPDs often have a better payer mix than the core hospital. For example, the net patient revenue generated by reimbursements from Medicare and Medicaid dropped to 26.6% of overall net patient revenue in the third quarter of 2012 versus 34.0% in the comparable period of 2011.
The most recent acquisitions (the three clinics at the Kingwood Diagnostic and Rehabilitation Center, the Robert Horry Center for Sports and Physical Rehabilitation Center and the sleep and imaging center in Baytown) are expected to contribute $12.5 million in incremental revenue and $4.2 million in EBITDA during the first year within the University General system. Management expects both to continue filling in its health care network in the Houston market and also to replicate the process in other metropolitan areas, initially within Texas.
We reaffirm our Outperform rating and recently raised price target of $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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