We are initiating coverage of a great hospital network generating nearly $200M in annual revenue that is operating profitably and due to its hub and spoke strategy is set to more than triple its adjusted EBITDA from 2013 to 2015. In our view, this low priced stock is significantly undervalued and is an easy double from here.
Download Report in PDF Or Scroll down to read the complete report below.
Founded in 2005 and publicly traded since 2011, University General Health System has built itself into a rapidly-expanding regional healthcare delivery network in and around the greater Houston and Dallas metropolitan areas. The Company provides diversified, multi-specialty acute and sub acute care within an integrated suite of services designed to appeal to both doctors and patients. Its business is divided into three segments – Hospital, Senior Living, and Support Services. The largest of the three and highest revenue generator is the Hospital segment, where two facilities exist – University General Hospital, with 69 beds and the former Dallas South Hampton Community Hospital, acquired by the company in December 2012, with 111 beds. University General Health’s entire ‘ecosystem’ of services includes three ambulatory surgical centers, three diagnostic imaging centers, two physical therapy centers, two hyperbaric wound care centers, two sleep diagnostic centers, a sports medicine and rehabilitation center, and six facilities for senior living.
Hospitals are the focal point of University General Health’s platform and provide an array of medical and surgical services on an inpatient and outpatient basis. These are comprised of an emergency/intensive care unit; a pathology lab; radiology; internal and general medicine, where patient wellness is diagnosed and maintained through a choice of ‘packages’ of test panels for health risk assessment and disease prevention; general surgery that includes doctors trained in areas of vascular, critical care and pediatrics; cardiovascular services with heart catheterization procedures to open clogged arteries; specialists in gastroenterology that routinely perform colonoscopies; orthopedics and pain management services; spine surgery, bariatric surgery to prevent obesity from becoming fatal; a department dedicated to preventing an outbreak of infectious disease; and departments for urology, neurology, and podiatry.
Ancillary services such as MRI or CAT imaging can be done inside the hospital or through one of its three outlying facilities. Patients requiring physical therapy are directed to any of six stand-alone clinics. Sleep studies for apnea, narcolepsy or restless leg syndrome are referred outside the hospital, to one of University General Health’s sleep centers, where prevention is important to avoid the risk of heart disease, high blood pressure, stroke, and injuries from falling. Cosmetic or reconstruction surgery, particularly of the hand, is done within the hospital, as are bronchio thermoplasty treatments using radio frequency via catheter for severe asthma.
Hospital food and nutrition services are provided by wholly-owned SYBARIS of Houston, which also provides catering, janitorial, plant maintenance and engineering, and a variety of environmental functions. University General Health’s hospitals, however, do not support open heart surgery, organ transplant, long-term cancer patients, or obstetrics which keeps costs down (a potential savings of up to $500,000 per bed) and allows a higher degree of efficiency and quality directed toward other services.
Senior Living offers housing in a pleasant community setting with round-the-clock help for residents, and runs the gamut from individuals in good health to those that are more frail and elderly, thus setting up a continuum of care that typically captures patients in the early years before full-time care is necessary in one of University General Health’s skilled nursing facilities. Memory care for Alzheimer’s disease and progressive dementia are also available. TrinityCare is distinctive from a competitive standpoint as it is the only existing for-profit, ‘faith-based‘ senior living facility.
Within Support Services, a fast-growing segment, billing, coding and revenue cycle management (to catch errors and improve collection of accounts receivable, leading to higher liquidity) is performed for the hospitals and its subsidiary healthcare providers. Concierge services, a unique hospitality offering not often seen in similar institutions, are also provided to patients and visitors. This unique high value, high touch service approach has enabled the Company to record higher occupancy rates than its competitors.
World-class physician talent totaling over 800 physicians (much of it culled from the nearby Texas Medical Center), attractive surroundings and patient comfort are hallmarks of University General Health’s platform. Its facilities contract with most managed care payors; just recently, UnitedHealthcare members, nearly 4 million Texans, will have access to the network, significantly broadening the company’s patient base.
A Hub and Spoke-Based, Physician-Centric Business Model
Central to University General Health’s strategy is to purchase or build acute care hospitals that act as a hub for a collection of auxiliary services like outpatient surgery centers, diagnostic imaging, free-standing emergency rooms, physical therapy and senior living facilities. This plan would in effect create a regional network able to provide services under the company’s acute care licenses, in a geographic radius of 30-35 miles, for true vertical integration and a single source of services for physicians and patients alike. Many of the facilities under development or acquisition have a real estate component (owned by an affiliate of University General Health) and an operating component. The overriding philosophy is to build a physician-centric model where doctor-owners of each hospital are engaged to promote the tenets of high quality care using the latest medical tools in a calming and appealing environment, leading to better patient outcomes.
Acquisitions are mostly opportunistic but favorable demographics play a large role. Besides its acquisition of South Hampton Community Hospital in Dallas and potential expansion of ancillary services around it, University General Health has purchased TrinityCare consisting of three senior living communities, and management of an assisted living facility, and two ‘greenhouses’, or clusters of small homes designed for patients who specifically require memory care. Autimis Billing and Coding was bought several years ago to augment the company’s revenue cycle management effort in all of its facilities. Baytown Endoscopy Center, a three-bed ambulatory surgical center for gastroenterology and pain management joined University General’s network in 2012 and will act as an outpatient department to University General Hospital. Other recent acquisitions and the launch of new facilities include those dedicated to diagnostic imaging and physical therapy, sleep disorders, sports medicine rehabilitation, a pain management medical practice and an additional ambulatory surgical center connected to the Dallas hospital.
All current and new facilities under development will conform to University General Health’s mission to build regional, diversified healthcare networks, with ambulatory surgical centers, physical therapy and diagnostic imaging facilities considered a hospital outpatient department (HOPD) of the nearby hospital hub. Physician-owners of acquired properties will integrate into the main hospital, expanding and strengthening the provider base to affect greater occupancy levels and gain share in the highly attractive but competitive Houston and Dallas healthcare market. As the company progresses, more purchases will be matriculated into new or existing networks within Texas or surrounding states with a concentration in the Southwest where healthcare is a booming business as more retirees seek out warm climates. As in the past, synergies can be realized through cost-cutting, mainly within Support Services. Economies of scale can be achieved through food services, and consolidated top-line revenues should benefit from a wider physician referral base.
University General Health’s headquarters are in Houston, TX. The company employs approximately 1,300 people, 800 of whom are physicians, the balance consisting of nurses, technicians, therapists, facility workers and administrative staff.
Expansion in 2015 is a Game Changer
The Company plans to invest $16 million in 3 facilities in the Houston suburbs that are slated to come on line during 2015. These facilities are a key to the hub and spoke strategy whereby these new sites under development will provide key services such as HOPD but also serve as a feeder for the core Houston hospital. University General Health already owns roughly 45% of the combined $15M real estate value associated with the facilities, at no cash cost to the Company. This major benefit is due to the real estate partner’s expectation that future cash flows and that the anticipated valuation of the properties will be substantial once operations are in full swing. At this time, management plans to make a $16M investment in the operations of the combined facilities’, which houses 112 beds in order to reach full occupancy and financial optimum financial performance.
With an estimated $170 million in annual revenue and $40 million in adjusted EBITDA from these facilities alone once they reach maturity, investors should be handsomely rewarded in the next 2-3 years. It should be noted that our forecasts do not include any contribution from these facilities. Moreover, this successful and logical strategy can be replicated throughout the region, thus making University General Health a top tier, high growth health care services provider.
As of early 2014, management expects the 3 expansion facilities to come on line as per the following timeline:
Healthcare is our country’s largest industry, providing almost 14 million jobs over 6,013 hospitals and countless clinics for ambulatory surgery, diagnostic imaging, rehabilitation, skilled nursing facilities, family practice, and a host of medical specialties. IbisWorld estimates that hospitals comprise a $923 billion industry, housing over five million employees and growing at 4% per year. People are living longer and expect the highest quality of care whether it is immediate or preventative. According to the National Center for Health Statistics, demand for physicians, nurses, physical therapists, technicians and administrative staff will grow at a healthy pace as hospitals focus on efficient management and profitability.
The hospital industry has been profitable although in recent years the swelling ranks of the uninsured have drained resources; only 10% of invoices billed to these patients are ultimately recovered. Bad debt expense has been rising through the industry as, by law, all patients presenting to the emergency room must be treated. Baby Boomer drain on Medicare often causes Congress to reduce reimbursements to healthcare providers, yet people 65 and over account for 40-50% of total spending on healthcare. Hospitals with older business models feel the heat of competition when confronted with independent and physician-owned surgical and diagnostic centers.
The implementation of the Patient Protection and Affordable Care Act (ACA) is expected to stimulate demand for healthcare services as more Americans become insured. However, high labor costs within the industry are predicted as hospitals experience a shortage of qualified workers. It is forecast that reimbursement from Medicaid and Medicare becomes tighter under a federal government that seeks to finance healthcare reform; coupled with states that must deal with budget deficits, an overall negative impact to hospital profitability could result.
Traditionally, those seeking careers in healthcare were attracted to its humanitarian and service aspect. The industry, however, is now viewed as a business, run like any major for-profit organization with similar strategic goals. Patients are treated more like customers – consumers of healthcare – who, like in any industry, expect a high level of quality and service for their money. Managed care, through which most Americans receive healthcare, in addition to Medicare and Medicaid, continues to plague providers with restrictive drug formularies, a cap on patient time, and unrelenting reimbursement adjustments.
Runaway costs in the hospital industry are common; rising malpractice insurance premiums and prescription-drug prices, and the uninsured that often use the emergency room doctor as their primary care physician, are factors leading to higher expenses for caregivers. In a type of push/pull contest, if revenues for doctors and hospitals fall, insurers attempt to lower payments for claims and ensure that revenue from premiums rise faster than claims payments.
The U.S. government limits the amount of hospital reimbursement for Medicare and Medicaid patients with a ceiling on prices charged to treat them. The impact to a hospital’s revenue is typically significant since this group comprises 30%-40% of total patients. As this number grows over time, federal resources will be further taxed and possibly trigger more reimbursement cuts, affecting the hospital’s ability to raise prices.
With thousands of providers throughout the country, the hospital industry is fragmented with competition limited to a given network’s geography. A handful of hospital networks are public: Community Health System (CYH:NYSE) is the largest for-profit operator with 2% of the market, acquired with its 206 hospitals in 29 states and 31,000 beds. A recent merger with Health Management Associates will expand its reach even farther. Otherwise, no one operator has greater than 5% market share, and the four largest companies accounted for less than 10% of industry revenue in 2013.
Greater competition also comes in the form of physical therapy clinics that have proliferated as older individuals remain active and often sustain minor injuries. Physician-run outpatient surgery centers and diagnostic imaging facilities are increasing in number, another aspect of competition to the traditional hospital model. Reuters Health reports that up to 30% of the 57 million surgeries done each year are performed through ambulatory surgical centers. Hospitals lose because the income provided by high-margin operations finance other, unprofitable departments. Winners in the industry will recognize the value of broad networks of healthcare under one hospital hub, and seek to adopt it.
The hospital industry has high barriers to entry due to strict regulatory requirements on federal, state and local levels, and the need for operators to have a strong base of experience to run hospitals and their networks efficiently. Hospitals must stay abreast of technological advances or risk physician flight to more modern tools in better-equipped facilities. Two-thirds of the country’s 660,000 physicians are specialists, such as surgeons, anesthesiologists, neurologists, and radiologists, a group highly knowledgeable about current medical trends and demanding of state-of-the-art equipment.
Texas is known as having some of the best medical facilities in the country, such as M.D. Anderson Cancer Center in Houston, ranked first by U.S. News and World Report for cancer care. In the same report, Texas was home to 13 institutions out of a total of 193 top hospitals reviewed, the only state to receive such high recognition.
THE UNIVERSITY GENERAL HEALTH SYSTEM TEAM
Competition is a key risk for the company; there are 168 hospitals within the radius of University General Hospital, including 15 that are part of Texas Medical Center. HCA Holdings, Inc., concentrated in Texas and Florida, owns from 20% to 40% market share in those regions. Fortunately, University General Health has established a strong presence in the greater Houston market and is competitive for reasons outlined earlier. Demand for healthcare services continues to rise in Texas, yet the State remains below the national average in beds per capita, forcing healthcare providers to offer the best services in order to entice referring physicians and their patients. The Dallas market is under-penetrated with 75 hospitals, making it a good choice for University General Health to penetrate.
University General Health is at present concentrated in Texas. Any adverse economic condition there could affect its entire business. However, plans are being made to expand to other regional markets with a long term plan to branch out into other geographic areas, somewhat mitigating this risk.
Physicians are the lifeblood of University General Health’s hospitals. Although they may terminate at will, the company hopes to retain is medical talent with contracts, and by offering the convenience of accessibility to its outpatient clinics where patient flow is more predictable and greater efficiencies can be reached. Likewise, obtaining and keeping managed care plans are essential and so far, University General Health has been successful.
Reimbursement risks from third-party payors will always persist, no matter who the healthcare provider. Hospital networks must endure reimbursement volatility from federal, state and local authorities as well. The majority of regulations under the ACA, signed into law in 2010, won’t take effect until 2014 and it has already started affecting out of network providers. However, University General Health has focused on being an in-network healthcare provider, partnering with two more major insurance providers at the beginning of 2014. University General Health now has a large share of in-network insurance providers which will alleviate concerns of declines in reimbursements.
Conforming to requests for licenses and certifications can be daunting, although University General Hospital is accredited by the Joint Commission, an organization that approves healthcare facilities within certain performance measurement requirements. A blessing by the Joint Commission is recognized by most states as a condition of licensure, easing the company’s burden of regulatory compliance.
Finally, expansion timing could be delayed due to funding delays associated with one or more of the facilities contemplated for 2015 expansion.
FINANCIAL DISCUSSION AND PROJECTIONS
University General Health is in a high-growth phase of its business cycle, as evidenced by its most recent financial statements. For 3Q2013 (ended September 30), net revenues for patient services increased 35%, to $43.1 million, reflecting both organic growth and growth through acquisitions of new facilities, including those for outpatients. Overall revenue that counts in Senior Living and Support Services rose 38%, to $49.6 million. The company’s flagship Houston hospital showed an average occupancy rate of 65%, similar to the same period last year and higher than the industry average for hospitals its size as calculated by the American Hospital Association. Further gains in net patient revenues are expected throughout the remaining quarters of 2014.
Revenue mix was favorable in the quarter: managed care providers continued to dominant with over 70%, alleviating headaches associated with collecting from government agencies. Operating income of $2.8 million had declined year-over-year due to losses at the newly-acquired Dallas facility, and greater spending for marketing and management services as the company continues to expand operations. Consequently, adjusted EBITDA of $5.5 million was lower than the comparable period last year, although net income attributable to common shareholders of almost $1 million, or $0.00 per share, was in line with last year’s figure despite a higher share base.
For the nine months ended September 30, 2013, total revenue of $127.2 million was 51% higher than last year; net patient revenue rose 48%, to $111 million; and occupancy rate remained a steady 62% in the Houston facility.
To cast our revenue projections, we used as a basis annualized figures for 2013, and applied a trend in top-line growth rates throughout the duration of the model that was designed to be conservative. Operating expenses as a percentage of revenue were held steady, moderating slightly to reflect management’s growing skill in finding economic synergies among its acquisitions. We predict that University General Health will generate $5.5M in adjusted EBITDA in 2013 and over $14M in adjusted EBITDA in 2014, rising to $18M+ in 2015. It should be noted that our forecasts do not include any contribution from the new facilities slated to open next year. Clearly, these facilities alone with be a major contributor once they reach the maturation stage in the 2-3 years following their respective launches. Management projects that these sites could generate $170M in revenue and $40M in adjusted EBITDA alone. While its core facility enjoys solid profitability, the Dallas site, which is the current drag on overall operating EBITDA, should turn dramatically in the coming quarters. As a result, investors can enjoy a rise in these shares as the Company’s financial performance reaches a key inflection point.
Like similar firms undergoing rapid growth, University General Health’s balance sheet reflects debt incurred in order to fuel its business. Of comfort to investors is the fact that the company has proven its ability to raise funds in the marketplace, if necessary. Prudent financial management orchestrated by a highly-experienced team should soon result in greater cash flow and a shift to a more ‘top-heavy’ balance sheet favoring liquidity.
University General Health System Actual and Projected Income Statements
UNIVERSITY GENERAL HEALTH SYSTEM, INC.
To assign a target price for University General Health, we used a discounted cash flow model as the company is not projected to be net earnings positive until 2016. We chose a forward P/E multiple of 18x, reflecting the median P/E of its peer group comprised of Community Health Systems, Inc. (NYSE – CYH); HCA Holdings, Inc. (NYSE – HCA); Lifepoint Hospitals Inc. (NASDAQ – LPNT); Tenet Healthcare Corp. (NYSE – THC); and Universal Health Services Inc. (NYSE – UHS). Recent years’ top-line performance and our estimates yield a compounded annual revenue growth rate from 2011 to 2016 of 30%, much higher than comparable companies whose five-year growth rates range from 9% to 17%, with an average of 11%. Keeping conservative, we did not inflate the forward P/E ratio for the purpose of calculating a target price. We chose a relatively high discount rate of 15% to reflect the stock’s liquidity risk, company size risk, and its shorter duration of time operating within its industry, as compared to its peers. Based on our 2016 EPS estimate of $0.03, we arrived at a price of $0.55 per share. Discounted to the present, our near-term target price for University General is $0.42 per share, which excludes the contribution from the launch of the 3 new facilities. When this is included, the target price likely rises by at least 25%.
As these other facilities contribute to overall profitability beginning next year, we will likely incorporate the use of alternative valuation metrics such as price/adjusted EBITDA or a sum of the parts analysis, given the varied contributions of the facilities in the entire system, value of the investment and the target markets of the Company’s service offerings, such as Senior Living. By utilizing such measures, a more accurate valuation for the most profitable facilities and diversified segments can be garnered. In this manner, a preliminary estimated valuation of $0.70 is not out of the question in the next 2+years.
University General Health has made tremendous progress since its inception, and continues to execute its acquisition strategy to create a physician-centric delivery network seamlessly integrated within an eco-system designed to benefit both patients and physicians. Resources are shrewdly deployed toward the latest in technology, facility improvements, and the addition of new and valuable services, all in the name of better patient care. Expansion into the Dallas market gives University General a greater presence in its home state of Texas, and new ventures into other territories in the Southwest, a geographic area that increasingly draws aging retirees that insist on high-quality healthcare services, should ultimately result in rising revenue with a favorable impact on net income. Shares of University General are undervalued, a situation that may soon be rectified as the company delivers on its promises in 2014 and beyond. Thus, we rate UGHS Speculative Buy.
Recent Trading History For UGHS
You Might Also Like
SENIOR ANALYST: ROBERT GOLDMAN
Rob Goldman founded Goldman Small Cap Research in 2009 and has over 20 years of investment and company research experience as a senior research analyst and as a portfolio and mutual fund manager. During his tenure as a sell side analyst, Rob was a senior member of Piper Jaffray's Technology and Communications teams. Prior to joining Piper, Rob led Josephthal & Co.'s Washington-based Emerging Growth Research Group. In addition to his sell-side experience Rob served as Chief Investment Officer of a boutique investment management firm and Blue and White Investment Management, where he managed Small Cap Growth portfolios and The Blue and White Fund.
I, Robert Goldman, hereby certify that the view expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the recommendations or views expressed in this research report.
This Opportunity Research report was prepared for informational purposes only.
Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces research via two formats: Goldman Select Research and Goldman Opportunity Research. The Select format reflects the Firm’s internally generated stock ideas along with economic and stock market outlooks. Opportunity Research reports, updates and Microcap Hot Topics articles reflect sponsored (paid) research but can also include non-sponsored micro cap research ideas that typically carry greater risks than those stocks covered in the Select Research category. It is important to note that while we may track performance separately, we utilize many of the same coverage criteria in determining coverage of all stocks in both research formats. Research reports on profiled stocks in the Opportunity Research format typically have a higher risk profile, and may offer greater upside. Goldman Small Cap Research was compensated by a third party in the amount of $8000 for a research subscription service. All information contained in this report was provided by the Company via filings, press releases or its website, or through our own due diligence. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence. Analysts are compensated on a per report basis and not on the basis of his/her recommendations.
Goldman Small Cap Research is not affiliated in any way with Goldman Sachs & Co.
The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, or other firms. Goldman Small Cap Research relied solely upon information provided by the Company through its filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research report or note is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed.
This report does not take into account the investment objectives, financial situation, or particular needs of any particular person. This report does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with FINRA, the U.S. Securities and Exchange Commission or with any state securities regulatory authority.
ALL INFORMATION IN THIS REPORT IS PROVIDED “AS IS” WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.
For more information, visit our Disclaimer: www.goldmanresearch.com