In the latest in our NCAV review, we will examine Dynacq Healthcare Inc. which is a holding company that through its subsidiaries develops and manages general acute care hospitals that principally provide specialized surgeries. The for-profit hospital world is always a very tricky industry to analyze. There are many complicating factors including proper Medicare reimbursement and patient bad debt expense for out-of-pocket costs. The company has domestic exposure as well as a division in China. For those familiar with the hospital group you know it’s had a very rough stretch, and Dynacq is no exception.
Financials:
2009 Q4 | 2009 Q3 | 2009 Q2 | 2009 Q1 | 2008 Q4 | |||||||||||||
Period End Date | 08/31/2009 | 05/31/2009 | 02/28/2009 | 11/30/2008 | 08/31/2008 | ||||||||||||
Assets | |||||||||||||||||
Cash and Short Term Investments | 39.11 | 47.57 | 40.91 | 42.0 | 45.1 | ||||||||||||
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Total Receivables, Net | 8.94 | 8.39 | 12.38 | 15.11 | 18.02 | ||||||||||||
Total Inventory | 1.52 | 1.47 | 1.48 | 1.28 | 1.47 | ||||||||||||
Prepaid Expenses | 0.37 | 0.34 | 0.59 | 0.55 | 0.48 | ||||||||||||
Other Current Assets, Total | 0.77 | 0.73 | 0.77 | 0.81 | 0.86 | ||||||||||||
Total Current Assets | 50.72 | 58.5 | 56.13 | 59.75 | 65.92 | ||||||||||||
Property/Plant/Equipment, Total - Net | 14.86 | 14.97 | 15.07 | 15.33 | 15.23 | ||||||||||||
Goodwill, Net | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
Intangibles, Net | 0.0 | 2.58 | 2.4 | 0.0 | 0.0 | ||||||||||||
Long Term Investments | 18.57 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
Note Receivable - Long Term | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
Other Long Term Assets, Total | 1.12 | 1.06 | 1.25 | 0.26 | 1.1 | ||||||||||||
Other Assets, Total | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
Total Assets | 85.27 | 77.1 | 74.85 | 75.34 | 82.25 | ||||||||||||
Liabilities and Shareholders' Equity | |||||||||||||||||
Accounts Payable | 3.4 | 3.6 | 3.71 | 3.49 | 3.82 | ||||||||||||
Payable/Accrued | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
Accrued Expenses | 6.24 | 4.21 | 3.99 | 4.03 | 5.89 | ||||||||||||
Notes Payable/Short Term Debt | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
Current Port. of LT Debt/Capital Leases | 0.33 | 0.46 | 0.58 | 0.55 | 0.5 | ||||||||||||
Other Current Liabilities, Total | 0.13 | 0.61 | 0.22 | 0.19 | 4.42 | ||||||||||||
Total Current Liabilities | 10.1 | 8.88 | 8.5 | 8.27 | 14.62 | ||||||||||||
Total Long Term Debt | 0.34 | 0.35 | 0.37 | 0.53 | 0.26 | ||||||||||||
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Deferred Income Tax | 2.75 | 0.18 | 0.0 | 0.23 | 0.36 | ||||||||||||
Minority Interest | 0.24 | 0.17 | 0.08 | 0.08 | 0.08 | ||||||||||||
Other Liabilities, Total | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
Total Liabilities | 13.43 | 9.58 | 8.96 | 9.11 | 15.32 | ||||||||||||
Common Stock | 0.02 | 0.02 | 0.02 | 0.02 | 0.02 | ||||||||||||
Additional Paid-In Capital | 14.8 | 15.39 | 15.27 | 15.14 | 15.02 | ||||||||||||
Retained Earnings (Accumulated Deficit) | 53.15 | 54.29 | 53.28 | 52.99 | 53.64 | ||||||||||||
Treasury Stock - Common | -2.43 | -2.48 | -2.38 | -2.31 | -2.31 | ||||||||||||
Other Equity, Total | 6.3 | 0.3 | -0.3 | 0.4 | 0.56 | ||||||||||||
Total Equity | 71.84 | 67.52 | 65.89 | 66.24 | 66.93 | ||||||||||||
Total Liabilities & Shareholders’ Equity | 85.27 | 77.1 | 74.85 | 75.34 | 82.25 | ||||||||||||
In prior NCAV reviews, we were able to break down the balance sheet into its components and assign values on each line item. There was a certain degree of confidence in our assumptions. This is a much different case.
The company currently has a market cap of $36m. As of the most recent 10Q, the company has approximately $42m in current assets against total liabilities of $12.7m. However, almost $5m of that is represented by accounts receivables. As previously mention, receivables are quite vulnerable in the hospital group. In fact, the company specifies this as a significant risk. I would zero out this line item from the balance sheet even though this may seem overly conservative. To be considered a deep value opportunity (at least the way I define it) there needs to be a significant discount. In a situation such as this, I would demand an extra layer of safety.
There is an X factor here listed under long-term investments (yes, I realize that doesn’t equate to a Net Current Asset valuation). It currently lists this entry at $18.5million – which describes this asset as bonds available for sale. This is a very curious item as it looks like the company shifted a like amount from accounts receivable in fiscal 2008. It would be highly unusual to take payment in securities rather than cash – which could speak to the quality of the payer. Needless to say, this isn’t a very good sign. If I can’t count on realizing that market value, the numbers don’t work.
My take – too much risk for the potential reward.
Disclosure: none
