University General expands on acquisition of South Hampton Hospital
By Steven Ralston, CFA
This week, University General Health System (OTC Markets:UGHS) presented at the Oppenheimer Healthcare Conference in New York and provided some additional color on its pending acquisition of the South Hampton Community Hospital located in Dallas, Texas. The hospital is a 111-bed, 270-physician facility that is operating significantly below its breakeven threshold. By comparison, the company’s existing hospital, 72-bed University General Hospital in Houston, is operating well above its 38% breakeven threshold. Reflecting management’s strategy of developing a healthcare ecosystem with satellite HOPDs (hospital outpatient departments) around a core hospital, the company dramatically improved the capacity utilization at University General Hospital in Houston. For example, in the third quarter of 2012, the company achieved a 15% improvement in the hospital’s average daily inpatient census. As a result, profitability also improved. Management indicated in its presentation that once census exceeds the breakeven point, the contribution margin of incremental revenue is 75%. As a result, the company’s EBITDA margin in the third quarter of 2012 increased to 39.3% from 22.5% in the third quarter of 2011.
To read our full research report on University General Health System, download it here: Zacks Reaffirms Recently Raised Price Target of $0.90
Management hopes to leverage its experience in turning around University General Hospital by replicate the process at South Hampton Community Hospital, which will be rebranded as University General Hospital – Dallas. At some point, we expect the hospital to serve as an anchor hub to several HOPDs, which will enhance the offering of healthcare services and leverage the cost infrastructure of the Dallas system. The company has earmarked at least $1.0 million for capital improvements to enable the provision of concierge healthcare services consistent with the services that are provided in Houston. The acquisition also includes a 22,000 square foot medical office building, which currently is approximately 55% occupied. Over time, University General expects to improve that occupancy rate, as well.
Attractive Financing Terms – Of the $30 million purchase price, $28.5 million will be financed by Houston National Bank through a 4.25% promissory note. Management anticipates that the purchase qualifies for the opportunity to recognize an income tax deduction for advanced depreciation. The transaction is expected to close by year-end 2012.
Reaffirm Outperform Rating We reaffirm our Outperform rating and price target of $0.90, which incorporates the significant, recent positive revenue and EBITDA surprises into our valuation models. These are based on the company attaining first quartile valuation metrics of price-to-sales and enterprise value-to-EBITDA.
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