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SUN HEALTHCARE GROUP INC SUNH
January 07, 2011 - 9:07am EST by
DSE
2011 2012
Price: 13.60 EPS $1.38 $1.45
Shares Out. (in M): 25 P/E 9.8x 9.4x
Market Cap (in $M): 339 P/FCF 0.0x 0.0x
Net Debt (in $M): 59 EBIT 80 88
TEV (in $M): 399 TEV/EBIT 4.9x 4.5x

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Description

 

Brief Business Description:  SunHealthcare provides nursing, rehabilitative and related specialty healthcare services principally to the senior population in the United States. Sun's core business  is to provide inpatient services through 203 centres across 25 States.

Investment Thesis: SUNH is currently trading at a large discount (~45-65%) to its intrinsic value as derived through a Sum of the Parts using current comparable trading multiples of 9 skilled nursing operators.

Catalyst:  SUNH spun off its real estate assets on November 5th, 2010 into a separately traded healthcare REIT (SBRA). SBRA has rerated since the spin off and seems to be fairly valued based upon publicly traded comps.

Risks to Thesis:The valuation methodology is based on a relative value approach and therefore provides for significant downside if the market is overvaluing the sector as a whole. Mitigating factors are:

  •  I am using the lowest multiple of peers to derive my intrinsic value.
  • Using a conservative 7x EV/EBIT, you still get ~40% upside. 

Comparable Universe: Advocat Inc (AVCA); Skilled Healthcare Group,Inc (SKH), Sunrise Senior Living (SRZ), Five Star Quality Care Inc (FVE), Assisted Living Concepts (ALC), The Ensign Group Inc (ENSG), Kindred Healthcare Inc (KND), Brookdale Senior Living Inc (BKD), Emeritus (ESC)

  Adj EV/EBITDAR EV/EBITA 
Max                        17.90              61.2
Average                        13.33              21.7
Median                        13.83              12.1
Min                          9.06                8.7

Summary Pro Forma Financials for SUNH:

   Full Year    6 Months  
Period  Dec-09 Jun-10
     
Balance Sheet:    
ST Debt  NA           2,143
LT Debt  NA        152,130
-Cash  NA         75,831
=Net Debt  Na        78,442
     
Current Assets  Na        407,441
Net PP&E / Real Estate Inv.  Na        127,691
Intangibles + Gwill Na        385,747
LT Assets  Na        660,790
Total Assets  Na   1,068,231
     
Current Liabilities  Na        210,126
LT Liabilities  Na        352,712
Total Liabilities  Na      562,838
     
Minority Interest   Na                 -  
     
S-Equity  Na      505,393
Tangible Book  Na        119,646
     
P&L    
Revenue       1,881,799        947,874
Rental Expense           143,349         72,462
EBITDAR           241,381        123,567
EBITDA            98,032         51,105
EBIT           76,250         37,939
Net Income            34,520         17,547
+D&A           21,782         13,166
=FFO           56,302

        30,713

Valuation: EV/EBit or Adjusted EV/Ebitdar
EV/EBIT  Proforma EBIT (Dec 2009)           76,250
Minimum EV/EBIT of peers (KND) 8.7 x
Implied Enterprise Value       663,656
-St Debt (Pro forma June 2010)            2,143
-LT DEBT (Pro forma June 2010)         152,130
+Cash (Pro forma June 2010)           75,831
+19.1% Incremental Net Cash (Sept 2010)          19,046
=Implied Market Cap       604,260
   
Shares Outstanding           24,935
=SUNH Intrinsic Value   $      24.23
Discount 44%
Upside  78%
EV/EBITDAR  Proforma EBITDAR (Dec 2009)         241,381
Minimum Adj. EV/EBITDAR of peers  9.1 x
Implied Enterprise Value    2,187,796
-St Debt (Pro forma June 2010)            2,143
-LT DEBT (Pro forma June 2010)         152,130
+Cash (Pro forma June 2010)           75,831
+19.1% Incremental Net Cash (Sept 2010)          19,046
-Rental Obligation (rental exp. X 8)     1,146,792
=Implied Market Cap       981,609
   
Shares Outstanding           24,935
=SUNH Intrinsic Value 2  $      39.37
Discount 65%
Upside  189%

Catalyst

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