Skylight Health Group (Skylight Health Group Stock Quote, Chart, News CSE:SHG) is a highly undervalued name in the healthcare services sector, says Mackie Capital analyst Yue Ma, who delivered an update to clients on Tuesday.
Ma maintained his “Speculative Buy” rating but dropped his price target from $1.10 to $1.05, despite saying Skylight’s third quarter numbers came in better than expected.
Toronto-headquartered Skylight Health (formerly CB2 Insights) offers both onsite and telemedicine services, with a proprietary electronic health record (EMR) system and has a network of over 30 bricks-and-mortar clinics across 14 states in the US. With a patient base of over 120,000, Skylight offers a subscription-based healthcare model for uninsured Americans along with a traditional fee-for-services model for patients under Medicare, Medicaid and commercial insurance plans.
Skylight, which just completed its rebranding, announced on Monday its third quarter results for the period ended September 30, featuring revenue of $3.3 million compared to $4.2 million a year earlier and adjusted EBITDA of $331,122 versus a loss of $368,588 a year earlier. The drop in revenue was attributed to a change in revenue reporting for the same services rendered as a result of a change in regulations. EBITDA growth came from improvements to the company’s operating model along with the topline boost. since the quarter’s end, Skylight closed on a $5.8-million equity financing involving 12.2 million shares at $0.47 per share.
“We are excited to see the continued efforts of our team and commitment to patient care result in a second consecutive Adjusted EBITDA positive quarter and, for the first time in our company’s history, a full nine months of positive Adjusted EBITDA. We have continued to execute against our business plan, strengthen our management team and create programs that will ultimately delight our patients and optimize their health outcomes,” said CEO Prad Sekar in a press release.
Skylight said it’s seeing growth in patient visits and registrations following a temporary slowdown due to COVID-19, while its telemedicine platform “has created opportunities to further reduce the cost of healthcare delivery with lower overheads, higher margins and improved availability for patients.” The company said it had $10 million in cash as of November 27 to support its three-pronged growth strategy: expansion of insurable services to its current patient roster, subscription for the uninsured and underinsured and accretive acquisitions.
By comparison, Skylight’s Q3 revenue of $3.3 million was better than Ma’s $3.1-million estimate and its $0.3 million in adjusted EBITDA was better than the analyst’s estimate at negative $0.4 million.
Ma remarked on SHG’s clinic business which has been growing as of late, with the company having closed on two acquisitions since the start of the fourth quarter and is in the middle of acquiring a third (APEX Family Medical). Ma said together the three should bring in combined annual revenues of $4.8 million and $900,000 in annualized profits, while management has said it’s on track for a $20-million annual revenue run rate by the end of 2020.
Ma argued that Skylight is trading at a discount to its peers, estimating SHG to be currently at a 2021 EV/Sales multiple of 5.4x compared to the Primary Care Services/Telemedicine peer average at 10.5x.
“We are maintaining our ‘Speculative Buy’ rating and revising our target price from $1.10 to $1.05 due to the equity financing in November. Our valuation is based on applying an 11.0x EV/Sales to our 2021 annual revenue estimate of $20 million discounted by 15 per cent. SHG is a highly undervalued name in the telemedicine/primary care space,” Ma wrote.
Last month, Skylight announced a Letter of Intent to buy Denver, Colorado-based APEX Family Medical, which has a patient base of 5,000 and has primary care and wellness services. APEX reportedly generated in fiscal 2019 over $2.5 million in revenues and $0.5 million in net income. Skylight already has four physical clinics and a telemedicine platform in Colorado servicing 17,000 patients.
On the deal, Ma said, “The acquisition of APEX should strengthen CB2’s existing infrastructure in [Colorado]. SHG would pay $2.3 million to APEX in instalments across a six-month period, representing a 0.9x P/Sales multiple and a 4.6x P/E multiple.”
By the numbers, Ma thinks Skylight will generate fiscal 2021 revenue and fully diluted EPS of $20.0 million and negative $0.01 per share, respectively, and fiscal 2022 revenue and fully diluted EPS of $24.2 million and $0.00 per share, respectively.
Ma mentioned a potential tailwind for Skylight, relating that the US Supreme Court debated on November 10 that the individual mandate of Obamacare, which requires people to get health insurance or pay a penalty, could potentially be excised. On the news, Ma said, “We view this political development as favourable to SHG’s membership-based model which offers affordable health care to 33 million uninsured Americans.”
At press time, Ma’s new $1.05 target represented a projected one-year return of 40 per cent.