TISG: Initiated Stock Coverage Report

Healthy Prospects for Tri-Isthmus Group

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We are initiating coverage of Tri-Isthmus Group Inc., (Pink Sheets: TISG) with a Buy rating and near-term price range of $0.56 to $0.71 and a long-term target of $1.19 to $1.59. The company is rapidly building a healthcare facility business with attractive operating margins by acquiring and operating profitable or near profitable rural hospitals and ambulatory surgical centers in partnership with physicians. The company has raised approximately $12 million for acquisitions since its formation in mid-2005. To date, the company has acquired six facilities and taken its annual revenue run rate to $40 million from $3 million one year ago. It now has more than 350 employees in Oklahoma and California. The company’s balance sheet reflects over $29 million in assets.

Key Points

Focus on Rural Areas: In rural communities, hospitals are typically the primary source of healthcare and are usually the sole providers. This results in limited competition. Many rural hospitals are also reimbursed on a cost-plus-basis from Medicare, which allows full expenses recovery. Rural hospitals are able to obtain higher margins than their urban counterparts due to the following reasons:
Fewer patients with complex problems
Lower cost structure primarily due to geographic location
Limited competition and less third party payers

Scalable Business Model: TIGroup’s partnership model with physicians represents a unique and sound business opportunity. Physician recruiting and retention are major hurdles in rural facilities. TIGroup looks to ease this pressure in two ways: first, by providing modern and technologically updated facilities and second, by involving the physician in the revenue stream of the facility. This mutually-interdependent relationship fosters a co-operative and win-win situation.

Medicare Advantage Program (MA): In October 2008, TIGroup became a Medicare Advantage provider, which permits the company to be its own Health Maintenance Organization (HMO) in its markets. This creates a consistent revenue stream at the beginning of every month through captitated payments, or per person payment that is capped, while reducing dependence on collections from accounts receivable. The monthly payment from the MA program can then be used to cover various professional fees. TIGroup estimates that it will enroll approximately 5,000 patients by 2009.

Pink Sheets: TISG