Healthcare Services

Surgery Partners, Inc. (SGRY)

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EQUITY RESEARCH Initiating Coverage

April 20, 2023
Initiating Coverage of SGRY at OW w/ $43 PT
Price: $38.40
Price Target: 43.00 Investment Summary. We initiate coverage on Surgery Partners (“SGRY “) with an OW
Rating: Overweight rating and 12-month PT of $43. We see upside potential to long-term EBITDA growth
rate guidance in the mid-teens driven by 1) increasing capital availability for strategic
Key Statistics: M&A, 2) share gains, 3) higher acuity mix, and 4) potential for acceleration in the shift
Symbol NSQ: SGRY to outpatient. We view long-term mid-teens EBITDA growth guidance as conservative on
52-Week Range 20.46 - 63.87 multiple components of its build of 3-5% M&A, 3-5% margin expansion, and 6-8% revenue
Market Cap 4,839.5 (2-3% each of rate and volume). Efforts around strengthening the balance sheet, a highly
ADV (3 mo) 635,767 fragmented industry of capital-constrained targets, and a consistent track record of driving
Enterprise Value 6,493 accretion from acquired assets gives us optimism the $200M annual M&A and resulting
($M) EBITDA growth could prove conservative and drive further upside, as we believe FactSet
Shares Out (M) 126.0 consensus and our numbers sit below the company's guidance on M&A.

Research Analysts: Investing when peers are tightening budgets could drive outsized gains. SGRY is
Sarah James strategically investing (robotics, expansions, M&A) in a tough economic market; we believe
212-829-5203 we are already seeing signs of this paying off via share gains with GI (gastrointestinal)
Sarah.James@cantor.com case growth of 7.5% (2019-2022) and Ophthalmology at 3.9%, against an industry growth
rate of 2-3%, per the company. We believe surgeons are attracted to the OR (operating
REV ($M) room) availability and advanced robotics and are seeing traction in increased requests for
surgeon credentialing and growing utilization of newly credentialed surgeons. Investments
FYE Dec 2022A 2023E 2024E
1Q $596.2 $649.3E $714.4
are also driving up acuity mix, cardio, which carried a contribution margin per minute of OR
2Q $615.4 $683.9E $746.7 time nearly 2x that of other specialties and grew at a 26% CAGR (2019-2022), with 60% of
3Q $620.6 $679.4E $747.5 facilities having the potential to add cardio. Management is also positioning to move into
4Q $707.1 $775.8E $853.6 higher-acuity MSK (muscular skeletal) and GI, as well as moving to a more multi-specialty
Year $2,539.3 $2,788.4E $3,062.2 set-up (70% of facilities today), which drives up margins per facility.
EBITDA We believe SGRY's valuation is not getting enough credit for its improved balance
FYE Dec 2022A 2023E 2024E sheet despite being “past the turning point” on addressing bear concerns. Astute capital
1Q $77.1 $85.1E $98.6 deployment and a recent $885M raise has allowed the company to increase M&A and
2Q $86.1 $98.0E $110.4 capital expenditures, while also lowering its leverage ratio to 4.3x from 7.7x in 2018, and
3Q $96.2 $104.2E $117.1 giving guidance of hitting a run rate of $200M FCF and a 3.5x leverage ratio by 2025E. The
4Q $120.8 $140.4E $157.0 lowering of leverage from current levels assumes mid-teens EBITDA growth to $650M+ in
Year $380.2 $427.7E $483.1 2025E, with no further debt pay down. Paying down debt in 2022 allowed management
EV/ 17.1x 15.2x 13.4x to increase FCF guidance to $140M in 2023E from $100M vs. ($10M) in 2022, as well as
EBITDA
eliminating refinancing risk on a 2026 term loan with springing maturity that could have
Adj. EBITDA
pushed to 2025. Reaching FCF positive and self-funding M&As have been staples for bear
concerns, as the JV model run by SGRY has material cash payout to physician partners, a
model we believe contributes to the company's growth and share gain, and is not unusual
for ASCs (ambulatory surgery centers). Covid-19 created enough uncertainty to pull the
timeline guidance to hitting cashflow positive, but it is now reinstated and faster than
expected. Therefore, we see the company well-past the turning point on this issue. We
estimate two-thirds of every EBITDA dollar above $350M falls to FCF, and with mid-teens
EBITDA long-term growth on a $425M+ 2023E base, we see significant potential for cash
building to self-fund $200M+ annually of M&A and capex investments.

Valuation and Risks

Our $43 price target represents a 15.3x EV/EBITDA multiple on our 2024E EBITDA of $483M
and 17% upside from the current price. Our target multiple represents a 31% discount
to SGRY's five-year historical average, reflecting labor pressure and a 44% premium
to the provider group average, and also reflecting its higher EBITDA growth rate and
The Disclosure Section may be found on pages 10 - 11.
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April 20, 2023

margin expansion potential. Risks to our price target include labor shortages, payer and
government rate environment, consumer responses to a recession, ability to complete
multiple acquisitions annually, and clinical staff retention.

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Lever 1: M&A Pipe & Accretion Under-Appreciated

Surgery Partners has a strong track record of accretive acquisitions, bringing in operational expertise and expanding to
multi-specialty lift margins at acquired ASCs. With over 52% of ASCs operated by independent physicians, there is a long
runway of targets, and SGRY’s improved FCF generation could allow for execution above the long-term guidance of
$200M annually, in our view. The company exceeded this in 2022 with $250M in acquisitions, with average multiples <
8x EV/EBITDA, and has plans to do another $250M in 2023. In 2021, the company had $325M in acquisitions across 12
transactions, $160M in acquisitions across 10 transactions in 2020, and $35M in acquisitions across seven transactions
in 2019. Guidance to hit $200M+ FCF by 2025 should allow for self-funding, which is a change from past years where
capital raises were needed to fund M&A. We believe while maintaining (or better) M&A spend, the company should be
able to lower leverage levels from 4.2x to 3.5x, as the EBITDA accretion from recent deals shifts the denominator.

Management maintains a strong pricing discipline, paying average multiples of < 8x EBITDA, well below SGRY’s 17.8x
multiple. As well as a targeted focus on high Medicare population states, including CA, TX, and NY, the company is
selectively expanding its presence in the high-growth, short-stay hospital market.

Lever 2: Share Gains Positioned to Accelerate

Despite a tough economy, SGRY has accelerated robotics purchases, particularly in the MSK and cardio sectors, reaching
52 robots in SGRY facilities exiting 2022, up from 44 in 2021 and 22 in 2019. The contrast to smaller ASCs (over half
independently owned by physicians) in new robotics and ORs available is driving share gains across multiple specialties
and clear preference shifts by surgeons to actively choosing SGRY facilities.

 Demonstrated share gain: GI growing at a 7.5% case growth and Ophthalmology at a 3.9% case growth (CAGR
2019-2022), above the market CAGR of 2-3%.
 Driven by increases in surgeon preference: Requests for surgeon credentialing is growing at record rates, in our
view, with >70 new ortho physicians added in 2022 to the company’s 950+ base. Utilization of SGRY facilities by
those newly credentialed surgeons is also increasing, with growth in revenue per physician
recruited/credentialed increasing 55% from Jan.-Sept. 2022, showing their increased preferences for booking
with SGRY over other surgical location options. SGRY offers guaranteed time blocks uninterrupted by emergent
care and therefore maximizes its revenue and work/life balance, in our view. Increasing preference to use SGRY
centers is also evidenced with 95% physician partner retention. We view this as well above industry trends for
clinical worker retention and is in part driven by the company’s physician JV model.

Lever 3: High Acuity Case Mix Growth

Surgery Partners has been increasingly investing in high acuity through M&A, robotics, and specialty expansions,
including five cardio-capable facilities added in 2022. Multi-specialty focus is key to hitting target margins and is often
responsible for a large portion of the margin lift in acquisitions, according to management. 70% of facilities are multi-
specialty, 80% have MSK, and 60% have the potential for Cardio. Cardio contribution margin averages $53 per operating
room minute, well above Ortho’s $39, Ophthalmology’s $34, and GI’s $28. While still a small portion of the company’s
case mix today, cardio grew at a 26% CAGR from 2019-2022, and we believe has the potential to be a larger portion as
the FDA clears more procedures for outpatients. In 2018, 10% of cardio was performed in ASCs; management estimates
this could reach 33% over the next few years. More near term, we see case mix acuity lift from shifts within the MSK and
GI segments to higher acuity surgeries, particularly spinal where the percentage of procedures performed in ASCs ranges
from 10% in 2018 to the 30% management estimated in the mid-2020s. This is still well under the 66%+ Ortho and other
procedures. The current case mix is 36% MSK, 23% GI, 25% Ophthalmology, and 16% Other, including cardio. Revenue
mix is over 50% MSK.

Lever 4: Outpatient Market Growth Could Be Accelerated by a Tough Economy

The savings potential for employers, individuals, and payors offered by outpatient procedures will become even more
attractive in a tough economy, in our opinion. On the consumer side, you see this in surgical site research and selection,
where out-of-pocket cost data are far more available than in the 2008 recession, and in product growth like United’s

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(UNH, OW) Surest (fka Bind), which increases consumer price-seeking behavior. Employers that are more self-funded
than in the last recession, and payors that are dealing with a challenging margin environment, are looking at the 40-60%
average savings per procedure moved from inpatient to outpatient, and we believe are increasingly setting benefit
designs to favor shifting volume to outpatient.

 Total Market Growth: We estimate the $90B outpatient surgical market could gain an additional $58B of
surgeries currently performed in the $230B inpatient market. We see the most likely shifts as higher-acuity MSK
and low-acuity cardio cases and estimate 60% of shifting cases to be within SGRY’s core capabilities.
 ASC Growth Outpacing HOPD (hospital-based outpatient department): We see the fastest growth in ASCs (6%+
CAGR) as opposed to outpatient facilities attached to acute hospitals (HOPD, 2% CAGR), due to the incrementally
lower-cost setting and more consistent time blocks, and therefore revenue stream for surgeons who often
choose the venue.
 MSK Growth: Within specialties, MSK is the current fastest-growing submarket; SGRY saw a 114% CAGR in total
joint procedures from 2020-2022. Savings potential from moving 50% joint surgeries to ASC is $3B annually, by
our estimates. SGRY estimates it will hit 57% of all hip and knee surgeries in outpatient settings by 2028, up
from 31% in 2022 and 15% in 2018. Layering on a 6.3% CAGR for case growth, it implies over 1M joint surgical
cases in outpatient settings by 2028E, or roughly 3x current levels.

Factors That Could Drive Upside to 2023 Guidance

Management made several conservative assumptions in setting 2023 guidance that could provide room for upside,
including 1) assuming no benefit from backlog despite large insurer, United, assuming some in its guidance, and 2)
including some risk from a recession or job loss despite recent data suggesting that this may not be a recession, and if it
is, the data suggest it is likely a job-full recession as opposed to a job-less recession. Management is also working on
several margin-related initiatives, including renegotiating payor pricing and supply chain initiatives.

Contract labor spend as a percentage of revenue has remained consistent from pre-Covid-19 levels, although SGRY is an
outlier in this compared to peers that saw material inflation, in our view. We believe the driver of outlier status is a
combination of starting pay rates at ASCs being at the upper end of nurse pay ranges, evidenced by a consistent time to
fill open positions that remained 30-33% in-line with pre-pandemic levels, as well as management’s disciplined approach
to lower utilization to offset price inflation. Price inflation for contract labor has begun to dissipate, but remains high in
a few markets such as SoCal.

Valuation
Our $43 price target represents a 15.3x EV/EBITDA multiple on our 2024E EBITDA of $483M and 17% upside from the
current price. Our target multiple represents a 31% discount to SGRY's five-year historical average, reflecting labor
pressure and a 44% premium to the provider group average, and also reflecting its higher EBITDA growth rate and margin
expansion potential.

Risks
 Inability to fund growth without capital raises. Historically, Surgery Partners has needed to regularly raise
equity or debt capital to fund growth, as the majority of FCF generated was paid in dividends to physician
partners. Management has set expectations of being able to self-fund growth beginning in 2025. Should this be
pushed back, we believe investors could lose some confidence in the company and multiples could compress.
 Inability to continue margin expansion through operational efficiencies. Surgery Partners has shown progress
in margin expansion over recent years, but we believe investors’ base case could have further expansion. It may
become increasingly difficult to meet these expectations over time.
 Labor shortages. Heightened labor shortages could pressure margins, resulting in SGRY turning away customers.
Increased clinical labor churn could create a drag on efficiency or lead to gaps in care.

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 Pricing pressure. SGRY may receive rates from insurers and the government that do not cover the recent
increases in labor and supply cost inflation. We believe sentiment assumes a material improvement in price to
cost spread in 2025E and a modest one in 2024E; should this not occur, it’s likely consensus would be revised
downward and multiples compress.
 Ability to grow through capital deployment. SGRY’s multiple assumes continued growth through capital
deployment via ASC acquisitions, de novo builds, bed expansions, and the addition of higher acuity services. It’s
possible the acquisition rate could slow due to availability, pricing, or increased starting point earnings criteria
in a tougher economic and labor environment.

Company Description
Surgery Partners operates 126 ASCs and 19 short-stay hospitals across 32 states, staffed by 4.8K affiliated physicians and
serving 600K+ patients annually. As one of the largest players in the fast-growing $90B outpatient sector, the company
have continued to show share gain, driving an 18% Adj. EBITDA CAGR from 2017-2022. The company’s 15% 2022 Adj.
EBITDA margins fall below the 18.8-20% seen by peers THC (OW) and HCA (OW) despite their higher exposure to high-
margin ASCs. We believe this positions SGRY as having the largest multi-year margin expansion potential in the provider
sector. We also believe the improvement will be driven by efforts in operational efficiency, scale, eventual leveling off of
labor inflation, potential for out-year rate improvement from payors and government to reflect recent labor inflation,
and a shift into a higher acuity surgical mix. We see long-term EBITDA growth in the mid-teens range.

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SGRY Income Statement

Income Statement ($M) 1Q21 2Q21 3Q21 4Q21 2021 1Q22 2Q22 3Q22 4Q22 2022 1Q23E 2Q23E 3Q23E 4Q23E 2023E 1Q24E 2Q24E 3Q24E 4Q24E 2024E
Revenues 512 543 559 610 2,225 596 615 621 707 2,539 649 684 679 776 2,788 714 747 748 854 3,062
% Change Y/Y 16.2% 45.0% 12.7% 11.3% 19.6% 16.4% 13.3% 11.0% 15.9% 14.1% 8.9% 11.1% 9.5% 9.7% 9.8% 10.0% 9.2% 10.0% 10.0% 9.8%
Salaries & benefits 152 155 162 175 644 179 182 186 200 746 194 201 201 217 814 212 220 221 239 892
% of Revenue 29.6% 28.6% 29.0% 28.7% 29.0% 30.0% 29.6% 29.9% 28.3% 29.4% 29.9% 29.5% 29.6% 28.0% 29.2% 29.7% 29.5% 29.6% 28.0% 29.1%
Supplies 147 158 160 172 636 172 174 173 191 710 186 192 188 208 774 205 210 206 229 850
% of Revenue 28.7% 29.0% 28.6% 28.1% 28.6% 28.8% 28.2% 27.9% 27.1% 27.9% 28.7% 28.1% 27.6% 26.8% 27.7% 28.7% 28.1% 27.6% 26.8% 27.7%
Professional & medical fees 56 57 57 60 230 64 67 68 71 269 69 73 73 76 291 75 80 81 85 321
% of Revenue 10.8% 10.6% 10.2% 9.9% 10.3% 10.7% 10.8% 11.0% 10.0% 10.6% 10.6% 10.7% 10.8% 9.8% 10.4% 10.6% 10.7% 10.8% 9.9% 10.5%
Lease expense 23 23 23 22 91 20 20 22 21 82 22 22 24 23 90 24 25 26 25 99
% of Revenue 4.4% 4.2% 4.2% 3.6% 4.1% 3.4% 3.3% 3.5% 2.9% 3.2% 3.4% 3.3% 3.5% 2.9% 3.2% 3.4% 3.3% 3.5% 2.9% 3.2%
Other Op. Exp 32 32 34 35 132 37 39 41 40 157 41 43 40 42 166 45 47 44 47 183
% of Revenue 6.2% 5.9% 6.1% 5.7% 6.0% 6.3% 6.3% 6.6% 5.6% 6.2% 6.3% 6.3% 5.9% 5.4% 5.9% 6.3% 6.3% 5.9% 5.5% 6.0%
G&A Exp 27 25 26 27 104 30 26 18 29 102 28 25 24 28 105 29 27 27 31 114
% of Revenue 5.2% 4.5% 4.6% 4.5% 4.7% 4.9% 4.2% 2.9% 4.1% 4.0% 4.2% 3.7% 3.6% 3.6% 3.8% 4.1% 3.6% 3.6% 3.6% 3.7%
EBITDA 90 85 89 138 401 128 105 104 124 460 110 126 129 182 548 124 139 142 199 603
% margin 17.6% 15.6% 15.9% 22.5% 18.0% 21.4% 17.0% 16.7% 17.5% 18.1% 17.0% 18.5% 19.0% 23.5% 19.7% 17.3% 18.6% 19.0% 23.3% 19.7%

Adj EBITDA 73 76 76 114 340 77 86 96 121 380 85 98 104 140 428 99 110 117 157 483
% margin 14.2% 14.0% 13.7% 18.7% 15.3% 12.9% 14.0% 15.5% 17.1% 15.0% 13.1% 14.3% 15.3% 18.1% 15.3% 13.8% 14.8% 15.7% 18.4% 15.8%
Adj EBITDA excl. grant funds 62 73 76 103 314 76 86 96 120 378 85 98 104 140 428 99 110 117 157 483
% margin 12.1% 13.4% 13.7% 16.8% 14.1% 12.8% 14.0% 15.5% 17.0% 14.9% 13.1% 14.3% 15.3% 18.1% 15.3% 13.8% 14.8% 15.7% 18.4% 15.8%
D&A 26 25 25 23 99 27 28 30 30 115 31 32 32 32 126 33 34 34 34 136
% of Revenue 5.0% 4.6% 4.5% 3.7% 4.4% 4.6% 4.5% 4.8% 4.2% 4.5% 4.7% 4.7% 4.7% 4.1% 4.5% 4.6% 4.6% 4.6% 4.0% 4.4%
EBIT 64 59 64 115 302 100 77 74 94 345 80 94 97 150 422 91 104 108 164 468
% margin 12.5% 11.0% 11.4% 18.8% 13.6% 16.8% 12.4% 11.9% 13.3% 13.6% 12.3% 13.8% 14.3% 19.4% 15.1% 12.7% 14.0% 14.4% 19.3% 15.3%

Adj EBIT 47 51 51 92 241 50 58 66 91 265 55 66 72 109 301 66 76 83 123 347

% margin 9.2% 9.3% 9.2% 15.0% 10.8% 8.3% 9.4% 10.7% 12.9% 10.5% 8.4% 9.6% 10.6% 14.0% 10.8% 9.2% 10.2% 11.1% 14.4% 11.3%
Interest exp 53 53 54 60 221 56 57 61 61 235 49 49 49 50 197 50 50 50 50 200
% of Revenue 10.4% 9.8% 9.7% 9.8% 9.9% 9.4% 9.2% 9.8% 8.6% 9.3% 7.5% 7.2% 7.2% 6.5% 7.1% 7.0% 6.7% 6.7% 5.9% 6.5%
Pre tax income 11 6 9 55 81 44 20 13 33 110 31 45 49 100 224 41 54 58 114 267
% Pre-Tax Margin 2.1% 1.1% 1.7% 9.0% 3.6% 7.4% 3.2% 2.2% 4.7% 4.3% 4.8% 6.6% 7.1% 12.9% 8.0% 5.7% 7.3% 7.7% 13.4% 8.7%
Tax expense (0) 3 (1) (12) (11) (1) (4) (8) (10) (23) (5) (7) (7) (15) (34) (6) (8) (9) (17) (40)
Tax Rate 1.8% -44.3% 12.8% 21.6% 12.9% 2.9% 21.9% 58.2% 29.8% 21.1% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%
NI before NCI 11 9 8 43 71 43 15 6 23 87 26 38 41 85 191 35 46 49 97 227
Adj NI before NCI (6) (0) (4) 20 9 (8) (3) (2) 20 7 1 10 16 43 70 10 18 24 55 107
Less: NI attributable to NCI (32) (36) (31) (43) (142) (31) (34) (31) (47) (142) (31) (34) (31) (47) (142) (31) (34) (31) (47) (142)
NL attributable to Surgery (21) (27) (23) (0) (71) 12 (18) (25) (23) (55) (4) 5 11 38 49 4 12 19 50 85
Adj NI (17) 0 (4) 20 (1) (8) (3) (2) 28 15 1 10 16 43 70 10 18 24 55 107
% margin (3.2%) (0.0%) (0.8%) 3.2% (0.0%) (1.3%) (0.5%) (0.3%) 4.0% 0.6% 0.2% 1.4% 2.4% 5.6% 2.5% 1.3% 2.4% 3.2% 6.5% 3.5%
Adj EPS - Basic (0.30) (0.00) (0.05) 0.23 (0.01) (0.09) (0.03) (0.02) 0.28 0.17 0.01 0.08 0.12 0.34 0.55 0.07 0.14 0.19 0.43 0.83
Adj EPS - Diluted (0.30) (0.00) (0.05) 0.23 (0.01) (0.09) (0.03) (0.02) 0.27 0.16 0.01 0.08 0.12 0.33 0.54 0.07 0.14 0.18 0.42 0.82
Basic shares 55 69 81 85 72 88 89 89 102 92 129 129 129 129 129 129 129 129 129 129
Diluted shares 55 69 81 88 72 88 89 89 104 94 131 131 131 131 131 131 131 131 131 131

Source: Company data and Cantor estimates

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SGRY Cash Flow

Cash Flow ($M) 1Q21 2Q21 3Q21 4Q21 2021 1Q22 2Q22 3Q22 4Q22 2022 1Q23E 2Q23E 3Q23E 4Q23E 2023E 1Q24E 2Q24E 3Q24E 4Q24E 2024E
Net income 11 9 8 43 71 43 15 6 23 87 28 46 51 113 239 42 58 62 129 291
D&A 26 25 25 23 99 27 28 30 30 115 29 30 30 31 120 31 33 33 34 131
Non-cash lease exp 10 10 10 9 39 9 9 10 8 35 8 8 8 8 32 8 8 8 8 32
Non-cash interest exp 2 4 6 10 22 6 6 7 7 26 7 7 7 7 28 7 7 7 7 28
SBC 5 4 4 4 17 4 4 5 5 18
Loss on disposals (1) 1 2 0 2 (0) 1 2 8 11
Loss on debt extinguishment 10 (1) 0 9 0 0 15 15
Deferred taxes (0) (3) 1 11 9 1 4 8 10 22
Equity in earnings of uncon. affiliates (0) (0) 1 0 0 (1) 1 (0) (1) (2)
Impairment charges 0 0
Other non-cash income 0 (8) (8)
Changes in operating assets & liab
AR 4 (7) (15) (14) (32) 2 3 (2) (39) (35) 2 (5) 3 (6) (6) 5 (6) (1) (15) (16)
Medicare payments (7) (22) (20) (25) (74) (18) (22) (14) (5) (58)
DOJ settlement (32) 0 0 (32) 0
Other operating assets & liab 2 3 (7) (41) (43) 7 (7) (21) (46) (67) (19) 14 (3) 38 30 (18) 13 (1) 42 36
CFO 50 2 15 20 87 80 42 30 7 159 55 100 96 191 442 76 113 109 205 502
CFO/NI (3.0x) (3.5x) 1.0x (87.1x) (10.1x) (13.6x) (14.1x) 0.3x 10.4x 30.7x 11.2x 6.7x 5.7x 7.5x 6.0x 6.1x 5.0x 5.2x 5.5x
Capex (15) (14) (16) (14) (58) (18) (22) (17) (23) (81) (20) (25) (19) (25) (89) (22) (27) (21) (27) (97)
% of Revenue 2.8% 2.5% 2.8% 2.3% 0 3.1% 3.6% 2.8% 3.2% 0 3.1% 3.6% 2.8% 3.2% 0 3.1% 3.6% 2.8% 3.2% 0
Payments for acquisitions (2) (13) (86) (185) (286) (31) (44) (8) (64) (146)
Proceeds from disposals of facilities 2 0 0 4 6 0 0 0 13 13
Purchases of equity invt. 5 5 12 (77) (29) 0 (95)
Proceeds from sales of equity invt. 0 12 0 1 13
Other investing 0 0 0 0 0 (9) (2) 0 0 (12)
CFI (14) (26) (101) (190) (332) (47) (134) (54) (72) (308) (20) (25) (19) (25) (89) (22) (27) (21) (27) (97)
Long term debt principal payment (17) (293) (19) (15) (343) (17) (16) (48) (781) (862) (30) (30) (30) (30) (120) (15) (15) (15) (15) (60)
Receipts of long-term debt 1 283 10 6 299 12 1 39 167 218
Debt extinguishment premium payment (2) 2 0 0 (11) (11)
Proceeds from equity offerings 261 0 0 321 582 883 883
Equity offering costs (13) (0) 0 (15) (28) (25) (25)
Distributions to NCI holders (31) (32) (34) (34) (131) (36) (39) (35) (36) (147) (36) (36) (36) (36) (145) (36) (36) (36) (36) (145)
Payments for transactions with NCI holders 1 2 (1) (31) (28) (3) (1) 0 1 (3) 0
Debt issuance costs (1) (8) (3) 0 (12) 0
Preferred dividends payment (5) 0 0 0 (5) 0
Other financing (8) (3) (4) (4) (18) 1 (4) (3) (4) (10) 0 0
CFF 188 (53) (48) 230 316 (44) (59) (48) 193 42 (66) (66) (66) (66) (265) (51) (51) (51) (51) (205)
Change in cash & cash equivalents 224 (77) (134) 60 72 (11) (152) (73) 128.1 (107) (31) 9 10 100 88 2 34 37 126 200
Cash & cash equivalents, beginning 318 542 465 330 318 390 379 227 154.8 390 283 252 261 271 283 371 373 408 444 371
Cash & cash equivalents, end 542 465 330 390 390 379 227 155 283 283 252 261 271 371 371 373 408 444 571 571

Source: Company data and Cantor estimates

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SGRY Balance Sheet

Surgery Partners
Balance Sheet ($M) 2021 1Q22 2Q22 3Q22 4Q22 2022 1Q23E 2Q23E 3Q23E 4Q23E 2023E 1Q24E 2Q24E 3Q24E 4Q24E 2024E
Cash & cash equivalents 390 379 227 155 283 283 252 261 271 371 371 373 408 444 571 571
AR 430 412 412 422 456 456 454 460 457 462 462 457 463 463 478 478
% of Revenue 19.3% 17.3% 16.7% 17.0% 16.1% 18.0% 17.5% 16.8% 16.8% 14.9% 16.6% 16.0% 15.5% 15.5% 14.0% 15.6%
Inventories 61 63 64 69 71 71 69 72 70 77 77 76 78 77 85 85
% of Supplies 9.6% 9.2% 9.2% 9.9% 9.3% 10.1% 9.3% 9.3% 9.3% 9.3% 10.0% 9.3% 9.3% 9.3% 9.3% 10.0%
Prepaid exp 26 32 37 36 31 31 29 30 30 34 34 32 33 33 38 38
% of Revenue 1.2% 1.4% 1.5% 1.5% 1.1% 1.2% 1.1% 1.1% 1.1% 1.1% 11.8% 1.1% 1.1% 1.1% 1.1% 11.8%
Other current 39 51 48 57 79 79 79 79 79 79 79 79 79 79 79 79
Total current assets 946 937 788 738 921 921 884 901 907 1,024 1,024 1,018 1,061 1,097 1,251 1,251
PP&E, net 630 779 789 874 877 877 868 863 852 846 846 836 830 818 811 811
Intangible assets 44 42 42 42 42 42 42 42 42 42 42 42 42
Goodwill 3,912 3,968 4,036 4,187 4,137 4,137 4,137 4,137 4,137 4,137 4,137 4,137 4,137 4,137 4,137 4,137
Advances to affiliates 89 95 160 189 190 190 190 190 190 190 190 190 190 190 190 190
Operating lease assets 324 277 278 277 279 279 279 279 279 279 279 279 279 279 279 279
Deferred tax assets 114 114 110 103 92 92 92 92 92 92 92 92 92 92 92 92
Other long-term 59 120 131 169 144 144 144 144 144 144 144 144 144 144 144 144
Total assets 6,118 6,290 6,292 6,536 6,682 6,682 6,636 6,648 6,643 6,754 6,754 6,738 6,776 6,800 6,947 6,947
AP 125 123 126 138 152 152 147 152 149 164 164 162 166 163 181 181
% of Supplies 19.6% 17.9% 18.2% 20.0% 19.8% 21.4% 19.8% 19.8% 19.8% 19.8% 21.3% 19.8% 19.8% 19.8% 19.8% 21.3%
Accrued payroll & benefits 77 84 84 69 69 69 67 69 69 75 75 73 76 76 82 82
% of Salaries 12.0% 11.7% 11.5% 9.3% 8.6% 9.2% 8.6% 8.6% 8.6% 8.6% 9.2% 8.6% 8.6% 8.6% 8.6% 9.2%
Medicare payments 64 47 21 8 3 3 3 3 3 3 3 3 3 3 3 3
Other current 210 221 222 292 207 207 190 200 199 227 227 209 218 219 250 250
% of Revenue 9.4% 9.3% 9.0% 11.8% 7.3% 8.1% 7.3% 7.3% 7.3% 7.3% 8.1% 7.3% 7.3% 7.3% 7.3% 8.2%
Current portion of long-term debt 60 68 68 117 63 63 63 63 63 63 63 63 63 63 63 63
Total current liabilities 537 542 522 624 493 493 470 488 483 532 532 510 526 524 579 579
Long-term debt 2,878 3,025 3,019 3,103 2,559 2,559 2,536 2,513 2,490 2,467 2,467 2,459 2,450 2,442 2,434 2,434
Operating lease liab. 316 272 272 270 271 271 279 287 295 303 303 311 319 327 335 335
Other long-term liab. 87 96 96 96 75 75 75 75 75 75 75 75 75 75 75 75
NCI—redeemable 330 342 342 339 342 342 342 342 342 342 342 342 342 342 342 342
Preferred stock
Common stock 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Additional paid in capital 1,622 1,625 1,619 1,623 2,478 2,478 2,478 2,478 2,478 2,478 2,478 2,478 2,478 2,478 2,478 2,478
Accrued OCI (32) 25 44 83 76 76 76 76 76 76 76 76 76 76 76 76
Retained deficit (503) (490) (509) (534) (557) (557) (560) (547) (526) (460) (460) (449) (424) (393) (311) (311)
Stockholders' equity 1,089 1,161 1,155 1,173 1,998 1,998 1,996 2,009 2,029 2,095 2,095 2,107 2,131 2,163 2,245 2,245
NCI—non-redeemable 881 852 885 933 943 943 937 934 929 939 939 934 931 925 936 936
Total equity 1,970 2,013 2,041 2,105 2,941 2,941 2,933 2,943 2,958 3,035 3,035 3,041 3,062 3,088 3,181 3,181
Total liabilities & equity 6,118 6,290 6,292 6,536 6,682 6,682 6,636 6,648 6,643 6,754 6,754 6,738 6,776 6,800 6,947 6,947

Source: Company data and Cantor estimates

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April 20, 2023

Healthcare Services Comp Table

Relative P/E Valuation of Relative P/E Valuation of Price
Valuation Target Valuation Historical Valuation Current Price to Target to
Mkt Price Implied P/E P/E P/E '22-'24E CAGR 10Y Direct 5Y 10Y Direct
Payors Ticker Cap $B Rating Price Target Upside '23 '24 '23 '24 1Y 3Y 5Y 10Y Rev EBITDA 5Y Avg Avg Payors Peers Avg Avg Payors Peers
Cigna CI 75.8 N $259 $285 10% 10.5x 9.1x 11.5x 10.0x 11.2x 12.4x 13.2x 14.9x 13% 19% (31%) (39%) (27%) (24%) (24%) (33%) (30%) (27%)
Centene CNC 36.8 OW $69 $80 16% 10.8x 9.6x 12.6x 11.2x 11.9x 14.7x 16.5x 23.2x (3%) 24% (42%) (59%) (23%) (26%) (32%) (52%) (22%) (26%)
CVS CVS 95.6 OW $76 $87 15% 8.6x 8.3x 9.8x 9.5x 8.8x 10.8x 10.5x 14.3x (1%) 1% (21%) (42%) (34%) (31%) (10%) (34%) (34%) (31%)
Elevance ELV 108.9 OW $484 $547 13% 14.7x 13.0x 16.7x 14.7x 16.6x 17.0x 17.6x 16.2x 6% 11% (26%) (20%) 5% 8% (17%) (9%) 2% 7%
Humana HUM 61.8 OW $519 $597 15% 18.5x 16.2x 21.2x 18.7x 20.3x 22.6x 22.5x 21.3x 11% 11% (28%) (24%) 30% 25% (17%) (13%) 30% 23%
Molina MOH 16.0 OW $295 $354 20% 14.9x 13.0x 17.8x 15.6x 16.2x 21.7x 19.0x 52.0x 8% 12% (31%) (75%) 5% 1% (18%) (70%) 9% 3%
United UNH 454.8 OW $505 $591 17% 20.2x 17.8x 23.7x 20.9x 22.7x 24.0x 23.0x 21.1x 9% 12% (23%) (16%) 43% 48% (9%) (1%) 45% 52%
Avg 14.0x 12.4x 16.2x 14.4x 15.4x 17.6x 17.5x 23.3x 6% 13% (29%) (39%) (18%) (30%)
High Growth HC Mkt Price Implied 2024 2024 EV/REV EV/EBITDA '22-'24E CAGR High Direct 1Y 3Y High Direct
Services Ticker Cap $B Rating Price Target Upside EV/Rev EV/ EBITDA EV/Rev EV/ EBITDA 1Y 3Y 1Y 3Y Rev EBITDA 1Y Avg 3Y Avg Growth Peers Avg Avg Growth Peers
Progyny PGNY 3.2 OW $33 $44 33% 2.4x 13.8x 3.2x 18.3x 4.3x 4.9x 27.7x 34.5x 27% 32% (60%) (60%) 16% 16% (34%) (47%) 12% 12%
DocGo DCGO 0.8 OW $8 $11 34% 1.1x 10.0x 1.6x 14.3x 1.4x 1.1x 14.0x 12.1x 17% 26% (17%) (17%) (16%) (16%) 2% 18% (12%) (12%)
Avg 1.7x 11.9x 2.4x 16.3x 2.8x 3.0x 20.8x 23.3x 22% 29% (39%) (39%) (16%) (15%)
Mkt Price Implied EV/EBITDA EV/EBITDA EV/EBITDA '22-'24E CAGR 10Y Direct 5Y 10Y Direct
Providers Ticker Cap $B Rating Price Target Upside '23 '24 '23 '24 1Y 3Y 5Y 10Y Rev EBITDA 5Y Avg Avg Providers Peers Avg Avg Providers Peers
Acadia ACHC 6.9 N $76 $83 10% 12.6x 11.4x 13.6x 12.3x 15.5x 12.6x 11.8x 16.8x 9% 8% (4%) (32%) 14% 18% 4% (27%) 14% 20%
Amedysis AMED 2.5 N $79 $87 10% 12.4x 11.8x 13.5x 12.9x 13.3x 24.4x 25.2x 19.7x 3% (3%) (53%) (40%) 17% (9%) (49%) (35%) 19% (9%)
HCA HCA 74.8 OW $271 $304 12% 9.2x 8.8x 9.9x 9.5x 8.6x 9.3x 9.3x 8.8x 4% 3% (5%) 0% (12%) 18% 3% 9% (12%) 20%
Surgery Partners SGRY 4.5 OW $37 $43 17% 16.0x 14.1x 17.7x 15.6x 20.4x 22.7x 22.5x 21.2x 10% 13% (37%) (33%) 41% 9% (31%) (27%) 44% 9%
Tenet THC 6.8 OW $65 $73 12% 6.3x 6.1x 6.6x 6.3x 6.8x 7.1x 7.4x 8.5x 5% 0% (18%) (29%) (40%) (18%) (15%) (26%) (42%) (20%)
UHS UHS 9.7 UW $136 $143 5% 8.4x 8.0x 8.7x 8.2x 7.7x 7.9x 8.5x 9.2x 6% 4% (6%) (13%) (20%) (18%) (3%) (11%) (24%) (20%)
Avg 10.8x 10.0x 11.7x 10.8x 12.0x 14.0x 14.1x 14.0x 6% 4% (21%) (25%) (15%) (19%)
Basis of EV/EBITDA: Adj EBITDA includes earnings from non controlled interests, debt includes finance leases and excludes operating leases
Source: FactSet, company data and Cantor estimates. Priced as of 4/18/23

Basis of EV/EBITDA and Target EV/EBITDA Calculation; EV Inputs Reflect Most Recent Quarter ($M)
High Growth EBITDA-NCI NCI (Loss) Target Current Pref ST Finance Leases Cash & Diluted
HC Services '23 '24 '23 '24 EV EV Stoc LT Debt Debt Not in Debt Equiv Shares
PGNY 169 217 3,984 2,920 0 0 0 120 100
DCGO 49 70 (4) (4) 938 657 1 1 8.6 157 103

EBITDA-NCI NCI (Loss) Target Current Pref ST Finance Leases Cash & Diluted
Providers '23 '24 '23 '24 EV EV Stoc LT Debt Debt Not in Debt Equiv Shares
ACHC 653 723 0 0 8,863 8,175 1,365 21 11.85 98 92
AMED 234 246 0 0 3,172 2,919 419 15 41 33
HCA 13,048 13,602 (860) (860) 121,380 112,358 37,714 370 908 0
SGRY 570 625 (142) (142) 7,515 6,763 2,559 63 283 104
THC 4,063 4,112 (730) (640) 21,820 21,006 14,934 145 858 106
UHS 1,706 1,806 0 0 14,856 14,373 4,727 81 103 72

Source: Company data and Cantor estimates

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April 20, 2023

Company Description
Surgery Partners operates 126 ambulatory surgical centers (ASCs) and 19 short-stay hospitals across 32 states, staffed by 4.8K affiliated
physicians and serving 600K+ patients annually. As one of the largest players in the fast-growing $90B outpatient sector, the company
has continued to show share gain, driving an 18% Adj. EBITDA CAGR from 2017-2022. The company’s 15% 2022 Adj. EBITDA margins
fall below the 18.8-20.0% seen by peers THC and HCA despite their higher exposure to high-margin ASCs. We believe this positions SGRY
as having the largest multi-year margin expansion potential in the provider sector. We also believe the improvement will be driven
by efforts in operational efficiency, scale, eventual leveling off of labor inflation, potential for out-year rate improvement from payors
and government to reflect recent labor inflation, and a shift into a higher-acuity surgical mix. We see long-term EBITDA growth in the
mid-teens range.

Disclosures Appendix
Analyst Certification
The analyst primarily responsible for this research report, and whose name appears on the front cover, certifies that: (i) all of the views expressed in this
research report accurately reflects his or her personal views about any and all of the subject securities or issuers featured in this report; and (ii) no part
of any of the research analyst’s compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed by the
research analyst in this report.

Legal Disclosures
Investment banking (next 3 months): Cantor Fitzgerald and/or its affiliates, expect to receive, or intend to seek, compensation for investment banking
services within the next three months from all of the companies referenced within this report.
Cantor Fitzgerald and/or its affiliates is a market maker in Surgery Partners, Inc..
Cantor Fitzgerald's rating system
Overweight/OW: We expect the stock’s total return to exceed 15% over the next 12 months. For the purpose of calculating the percentage of subject
companies within the Buy, Hold, and Sell categories for whom Cantor Fitzgerald has provided investment banking services within the previous 12 months,
an Overweight rating equates to a Buy rating.
Neutral/N: We expect the stock’s total return to be between -10% and 15% over the next 12 months. For the purpose of calculating the percentage of
subject companies within the Buy, Hold, and Sell categories for whom Cantor Fitzgerald has provided investment banking services within the previous 12
months, a Neutral rating equates to a Hold rating.
Underweight/UW: We expect the stock’s total return to fall below -10% over the next 12 months. For the purpose of calculating the percentage of subject
companies within the Buy, Hold, and Sell categories for whom Cantor Fitzgerald has provided investment banking services within the previous 12 months,
an Underweight rating equates to a Sell rating.
Not Covered/NC: Cantor Fitzgerald does not provide an investment opinion or does not provide research coverage on this stock.
Not Rated/NR: We are not currently carrying a rating on this stock. Rating and estimates are under review. The NR rating does not equate to an Overweight,
Neutral, or Underweight rating and thus is not counted in the calculation of the percentage of subject companies within these three categories for whom
Cantor Fitzgerald has provided investment banking services within the previous 12 months.
Performance parameters should be interpreted flexibly as general guidelines relating to performance over a twelve-month period and are not intended to
be influenced by short-term share price volatility. Performance in this context is evaluated in terms of total absolute return.
Total return is defined as the sum of (1) the percentage difference between the target price and the current price and (2) the expected dividend yield of
the stock.
Other Disclosures
This report is for informational purposes only and is based on publicly available data believed to be reliable, but no representation is made that such data
are accurate or complete. Opinions and projections contained herein reflect our opinion as of the date of this report and are subject to change. Pursuant
to Cantor Fitzgerald's policy, the author of this report does not own shares in any company he/she covers.

Cantor Fitzgerald and the Cantor Fitzgerald logo are trademarks or registered trademarks of Cantor Fitzgerald Securities or its affiliates in the U.S. and
other countries. Other trademarks appearing herein are the property of their respective owners. Neither Cantor Fitzgerald Securities nor its affiliates are
associated with or affiliated with such third parties.

This material is being presented solely as institutional communications and is not meant to be viewed as a complete fundamental analysis of any security.
This material may offer recommendations and strategies which are shorter term in nature. If the material contains analysis, it may be narrowly focused, and
may be based either purely on quantitative models or other unique factors such as market supply/demand factors surrounding potential market moving
events. When making an investment decision this information should be viewed as just one factor in your investment decision process. Past performance
should not be taken as an indication or guarantee of future results.

Disclosures for UK investors

10
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April 20, 2023

This material is only intended for use by eligible counterparties or professional clients who fall within articles 19 or 49 of the Financial Services and Markets
Act 2000 (Financial Promotion) Order 2001. None of the investments or investment services mentioned or described herein are available to other persons
in the U.K and in particular are not available to "retail clients” as defined by the rules of the FCA.
Disclosure for Canadian Institutional Investors
This research report was prepared by analysts of Cantor Fitzgerald & Co. and not by Cantor Fitzgerald Canada Corporation. As a result, this report has not
been prepared subject to Canadian Disclosure requirements. Cantor Fitzgerald Canada may distribute research reports prepared by its affiliates.
Risks
The financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based on
their specific investment objectives. Past performance should not be taken as an indication or guarantee of future performance. The price, value of and
income from, any of the financial instruments featured in this report can rise as well as fall and be affected by changes in economic, financial and political
factors. If a financial instrument is denominated in a currency other than the investor's currency, a change in exchange rates may adversely affect the price
or value of, or income derived from, the financial instrument, and such investors effectively assume currency risk. In addition, investors in securities such
as ADRs, whose value is affected by the currency of the home market of the underlying security, effectively assume currency risk.

Rating and Price Target History for: Surgery Partners, Inc. (SGRY) as of 04-19-2023
70
60
50
40
30
20
10
0
Q1 Q2 Q3 2021 Q1 Q2 Q3 2022 Q1 Q2 Q3 2023 Q1 Q2

I = Initiated; 1 = Overweight/OW or before 12/14/16; B = BUY; 2 = Neutral or before 12/14/16; H = HOLD;

3 = Underweight/UW or before 12/14/16; S = SELL; SP = SPECULATIVE BUY before 12/14/16; NR = Not Rated; D = Dropped
Powered by BlueMatrix

Distribution of Ratings/Investment Banking Services (IB) as of 04/20/23

Cantor
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [1/B] 234 81.82 160 68.38
HOLD [2] 52 18.18 22 42.31
SELL [SL/3] 0 0.00 0 0.00
(1)

Additional information available on request. Copyright (C) Cantor Fitzgerald 2023

11
U.S. Equity Research Analysts & Management

Director of Equity Research Large Cap Pharma, Biopharma & TECHNOLOGY

David Siffringer Biotech Alternative Energy & Industrial
212-829-7091 Louise Chen Technology
David.Siffringer@cantor.com 212-915-1794 Andres Sheppard
Louise.Chen@cantor.com 212-428-5983
BIOTECH/HEALTHCARE Andres.Sheppard@cantor.com
Biopharma & Biotech Carvey Leung
212-915-1917 Anand Balaji, CFA, CPA
Brandon Folkes, CFA
Carvey.Leung@cantor.com 212-610-2446
212-294-8081
Brandon.Folkes@cantor.com Anand.Balaji@cantor.com
Wayne Wu
Biotechnology 212-294-7879 Clean Tech
Wayne.Wu@cantor.com Derek Soderberg
Prakhar Agrawal
212-610-3614 212-359-8721
Jennifer Kim Derek.Soderberg@cantor.com
Prakhar.Agrawal@cantor.com
212-829-4860
Jennifer.Kim@cantor.com Consumer Internet
Rick Bienkowski
212-915-1801 Software
Life Science Tools & Diagnostics
Rick.Bienkowski@cantor.com
Ross Osborn Brett Knoblauch
212-915-1806 212-610-2221
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Ross.Osborn@cantor.com Brett.Knoblauch@cantor.com
212-428-5907
Olivia.Brayer@cantor.com
Medical Devices & Supplies Crypto & Blockchain
Charles C. Duncan, Ph.D. Brandon Folkes, CFA Financial Technology
212-915-1236 212-294-8081 Josh Siegler
Charles.Duncan@cantor.com Brandon.Folkes@cantor.com 212-428-5960
Josh.Siegler@cantor.com
Kristen Kluska Ross Osborn
212-915-1927 212-915-1806 Keeler Patton
Kristen.Kluska@cantor.com Ross.Osborn@cantor.com 212-829-5457
Keeler.Patton@cantor.com
Rick Miller, Ph.D. CANNABIS/WELLNESS
212-915-1803 Cannabis Will Carlson
Rick.Miller@cantor.com 212-829-4709
Cannabis Services
Will.Carlson@cantor.com
Jason Bouvier, Ph.D. Wellness
212-915-1122 Pablo Zuanic Security & Infrastructure Software
Jason.Bouvier@cantor.com 212.915.1057
Pablo.Zuanic@cantor.com Jonathan Ruykhaver, CFA
Pete Stavropoulos, Ph.D. 617-443-4473
212-915-1966 Jonathan.Ruykhaver@cantor.com
Pete.Stavropoulos@cantor.com
Yi Fu Lee, CFA, CPA, CMT, CAIA
Li Watsek 212-915-1235
212-915-1221 YiFu.Lee@cantor.com
Li.Watsek@cantor.com

Rosemary Li
212-829-7058
Rosemary.Li@cantor.com