Zacks initiates coverage of University General Health
System with an Outperform rating
Steven Ralston, CFA
Zacks has initiated coverage of
University General Health System (
UGHS
: OTCQB)
with an Outperform rating and a target of $0.58. University General
Health System is a multi-specialty health care provider that owns
and operates a regional healthcare network in the Houston
metropolitan area. The network is comprised of a core hospital and
several complementary healthcare facilities, including eight
hospital outpatient departments (HOPDs), one ambulatory surgical
center (ASC) and three senior living facilities. Management is
executing an aggressive growth plan to acquire additional
facilities, further developing the company's footprint in Houston.
The company's business model consists of the delivery of concierge,
patient-oriented care by motivated physicians which currently own
over 46% of the company.
Management's strategic growth plan entails the creation and
operation of regional health care networks developed around general
acute-care host hospitals in other metropolitan areas, replicating
the process employed in Houston. Each network is anticipated to be
built through the acquisition of a host hospital and ancillary
healthcare facilities within a radius such that they can operate
under the hospital's licenses as HOPDs. Each locally concentrated
system would consist of a core hospital, along with HOPDs, ASCs,
procedure facilities, diagnostic imaging centers, physical therapy
clinics, among others. By consolidating health care providers into
HOPDs, the University General network will benefit from higher
reimbursement rates. In addition, the company's physician-centric
model allows the network to capture incremental revenues for
procedures referred within the system. Initially, management plans
to expand geographically within Texas.
During 2011, the University General acquired three senior living
facilities, a support services organization that provides billing
and other administrative services (Autimis) and a luxury
hospitality service provider and facility management company
(Sybaris). In addition, the company acquired 51% of the support
services company that manages six senior living facilities and 15%
of Mainland Surgery Center. So far in 2012, University General has
acquired the Baytown Endoscopy Center, 1960 Digital Imaging (a
diagnostic imaging and physical therapy center), three clinics
(diagnostic imaging, physical therapy and sleep) located at the
Kingwood Diagnostic and Rehabilitation Center and the Robert Horry
Center for Sports and Physical Rehabilitation Center. University
General Health System is expected to continue acquiring ancillary
healthcare facilities in the Houston area in order to help fill out
in its health care network, including free-standing emergency
rooms, ambulatory surgical centers, diagnostic imaging centers,
physician practices, post-acute skilled nursing facilities (SNFs)
and other complementary facilities.
Through acquisitions and organic growth, total revenues increased
29.2% in 2011 to $72.5 million. Continuing the trend, during the
first half of 2012, total revenues advanced 44.5% to $48.2 million
over the comparable first half of last year. The company is also
reporting double digit increases in the average daily inpatient
census at University General Hospital.
Our price target of $0.58 is based on price-to-sales (P/S) and
enterprise value-to-EBITDA (EV/EBITDA) valuation methodologies.
University General is a small-capitalization company with a revenue
profile that should experience rapid growth both through internal
growth as the company's hospital network is better utilized and
through the execution of management's aggressive acquisition
strategy. The growing revenue stream has already manifested itself
into positive earnings in the second quarter of 2012. Based on
historical norms for similar specialty providers of
hospital-related services companies, we expect UGHS to trade in an
EV/EBITDA valuation range between 9.3 and 6.0, and specifically,
our target is based on UGHS attaining the first quartile valuation
benchmark of an 8.5 EV-to-EBITDA ratio due to the positive news
flow of the successful implementation of management's growth
strategies. Also, valuation based on the price-to-sales metric
confirms and reinforces the $0.58 price target. We expect UGHS to
trade in a P/S valuation range between 2.0 and 1.0, which is also
based on historical valuations of similar companies. The first
quartile P/S valuation benchmark is 1.8 or $0.58 per share. Given
management's stated business plan of becoming a creator, owner and
operator of regional health care networks in multiple metropolitan
areas, University General is expected to expand its revenue base
and level of profitability significantly.
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