Dougherty & Company LLC, an equity research company, announced the below today.
Last week, FDNH announced the sale of its miniority position in a hospital in Sherman, TX for $9.3M. Combined with the recent sale of a minority stake in a hospital in Houston, this largely completes the sale of positions in minority hospitals by Foundation. The company has used the proceeds of these two sales to strengthen its balance sheet. Combined, these actions clear the way for FDNH to build on its solid position as an operator of majority owned surgical hospitals. We affirm our buy rating and our $7.50 PT on FDNH shares. We believe FDNH represents a unique opportunity in the early phase of what is likely to be a long growth cycle.
- Sale of Sherman Complete – Last week, FDNH announced the company has completed the sale of its minority stake in a surgical hospital based in Sherman, Texas for $9.3M to a joint enterprise of Dallas-based Baylor Hospital System and United Surgical Partners Inc. This hospital contributed roughly $1.2M of adjusted EBITDA to Foundation annually (roughly $600,000 in the first half of the year and roughly the same in the second half of the year). Given that FDNH could not increase its ownership of the Sherman hospital to a majority position, this sale is consistent with the strategy management has for the company. We anticipate the majority of these proceeds will be used to retire bank debt. We also sense FDNH has an ownership position related to the real estate on which this hospital sits, and we think it likely the company will be able to sell that ownership position later this year for cash proceeds in the range of $4M. In general, we believe FDNH is continuing to pursue the acquisition of majority-owned surgical hospitals and we think it possible the company may be able to get at least one deal done in this regard this year.
- Core Business Remains Strong – Our sense is FDNH continues to have solid success running its majority-owned surgical hospitals in San Antonio and El Paso, Texas and we do not plan to change our forecast for FDNH for the year. We will obviously reduce our forecast for “equity in affiliates” and increase our forecast for earnings in the two majority owned hospitals.
- Investment Thesis – We believe FDNH has the key elements in place to drive sustained, profitable growth going forward. We are excited about opportunities in the surgical hospital market, which is now central to Foundation’s business model. We believe the company has the management talent to be successful going forward. We believe the company has put in place elements that will drive strong, profitable growth going forward and we sense this will attract the attention of investors as the performance becomes more visible. Our PT is based on the assumption that investors will put an 11x EV on our 2015 forecast for adjusted EBITDA. We are modeling for 35% growth of adjusted EBITDA this year.
- Foundation’s Core Business and Strategy–Today, Foundation operates 3 Surgical Hospitals (2 majority owned) and 8 Ambulatory Surgical Centers (ASCs, minority owned) in 7 states. We believe Foundation is focused on partnering with physicians to acquire and operate majority-owned (results can be consolidated) surgical hospitals.
- Ancillary Services – In addition, Foundation may seek to offer a range of related services through hospital outpatient departments (HOPDs), primarily in partnership with physicians and primarily in markets where the company operates one or more surgical hospitals.
- Target Rich Environment – The Company is focused on roughly 250 potential surgical hospital acquisition targets in the U.S. Many (most) of these are physician-owned hospitals which have restrictions on growth and other regulatory constraints primarily related to The Affordable Care Act of 2010. We believe FDNH’s experienced management, public ownership (an exception to the restrictions of the ACA) and potential access to capital should be competitive advantages which can facilitate rapid, profitable growth going forward.
- Experienced, Capable Management Team – Stanton Nelson is CEO of FDNH and he has been instrumental in leading the evolution of the company since he joined the board in 2003. He is an experienced and capable executive. At the end of 2013, the company acquired Foundation Surgical Hospital Affiliates formed in 2008 and Foundation Surgery Affiliates formed in 1996. Tom Michaud founded both companies and he is now FDNH’s largest shareholder and is Chairman of the Board. It is our sense that Michaud has brought virtually his entire operating team with him. We believe this team, combined with the addition of Hugh King as CFO and Travis Crenshaw as Chief Information Officer, is capable of running a company many times the current size of FDNH.
- Expect Rapid, Profitable Growth To Drive Strong Share Price Appreciation – Foundation currently has majority ownership of two surgical hospitals (San Antonio and El Paso, TX) and minority (unconsolidated) ownership of one other surgical hospital and a number of ASCs. We believe the company can expand its existing majority-owned hospitals, add new majority-owned hospitals and build out its presence in each target market by adding related services in partnership with physicians. As the number of such facilities controlled by FDNH grows, we believe revenue and earnings will likely grow rapidly as well. Foundation is targeting markets that can add a minimum of $60M of annualized revenue once they are fully developed.