Skylight Health is a Top Pick, says Echelon Capital

Organic and acquisitive growth are in the cards for Skylight Health Group (Skylight Health Group Stock Quote, Chart, News, Analysts, Financials TSXV:SHG), says Echelon Capital Markets analyst Rob Goff. In his update to clients on Thursday, Goff reiterated his Top Pick for 2021 call for SHG, saying the company is primed for success as a US health clinic consolidator.

Healthcare services and tech company Skylight (formerly CB2 Insights) operates a multi-state health network in the US with multi-disciplinary medical clinics providing primary care, sub-specialty, allied health and laboratory and diagnostic testing. The company has a proprietary electronic health record system offering telemedicine service and systems integrations and currently has a patient roster of over 120,000 across 14 states.

Skylight announced on Thursday three Letters of Intent (LOIs) to acquire three independent Primary Care practices which combined would add over $10 million in revenue and positive EBITDA when closed, according to a Skylight press release. The company said the three transactions will have a target closing price of between 4-5x EBITDA, which is consistent with Skylight’s five recent transactions, and will involve a mixture of cash, debt and shares, leaving Skylight with over $7 million in cash on hand.

“These types of transactions are an effective way to increase market penetration and continue to be one of the core strategies to augment our growth,” said Prad Sekar, Co-Founder and CEO of Skylight Health, in the press release. “We continue to build our pipeline of qualified acquisition targets and will be extremely disciplined about the acquisitions we pursue and focus on achieving favourable pricing and optimal accretion.”

Commenting on the news, Goff said he views the potential acquisitions positively as they add strategic value by gaining scale for SHG while likely proving accretive to the company’s bottom line and valuation.

“We expect the acquired clinics to fit the strategy of acquiring clinics where opex savings should approach ten to 15 per cent and organic growth should support initial revenue gains of 20 per cent to 100 per cent with longer term aspirations pushing +500 per cent with moves towards value-based care,” Goff wrote. “We would expect the clinics have little or no telehealth, relatively low annual visits per patient and limited specialist referral capabilities thus allowing for immediate revenue gains.”

Goff has adjusted his forecasts for Skylight due to the LOIs and is now calling for full 2020 revenue and adjusted EBITDA of $13.3 million and $1.4 million, respectively, 2021 revenue and adjusted EBITDA of $55.6 million and $7.4 million, respectively, and 2022 revenue and adjusted EBITDA of $79.3 million and $23.5 million, respectively.

Skylight, which was trading as CB2 Insights on the CSE before a rebranding late last year and move to the TSX Venture at the start of January, has seen its share price take off in 2021. The stock went from an initial $0.70 per share to $1.85 by mid-February although it has dropped down since then amid the general market pullback.

CB2 Insights was at one time an electronic data collection and records management platform for the cannabis space and aimed at integrating cannabinoid-based treatment options into routine clinical practices. Starting in 2017, the company began acquire its own clinics in the US before last year making the move to offering conventional medicine along with its alternative services, all the while continuing to scoop up clinics.

The rebranding as Skylight served to orient the company towards becoming one of the largest multi-specialty health systems in the US, one which finds its niche in offering a unique mix of traditional and non-traditional services.

“By providing a broad range of services that are not traditionally found under one clinic group, we are able to provide services both physically and virtually and we do so at a substantially lower cost to the patient,” said CEO Prad Sekar in a press release on November 30, 2020.

“We bring the focus back to the patient. Whether it is providing insurable services to patients with insurance or subscription services for the uninsured or underinsured, patients are able to have greater accessibility and greater affordability in an otherwise fragmented and complex industry,” Sedar wrote.

Goff said he sees sustained double-digit organic growth in Skylight through increases in patient visitation, additional service offerings, telehealth and remote patient monitoring, while keeping up with solid acquisition track record involving a stated pipeline of deals of over $100 million.

“SHG positioned itself as a preferred buyer in many cases offering full value with upfront cash and liquid public currency with a plan to become a continued owner of the business supporting optimum care levels in the community. In contrast, integrated delivery networks (IDNs) offer full value upfront in cash but limited support to the practice as it becomes a feeder for acuity specialties,” Goff wrote.

“We view Skylight as a compelling investment leveraged to its ability to add shareholder value through organic and acquisition-driven growth as a US health clinic consolidator. We believe current healthcare needs together with provider challenges in a fragmented industry present the opportunity for significant and sustained shareholder value creation,” Goff said.

With the update, Goff reiterated his “Speculative Buy” rating for SHG and $2.35 per share target, which at press time represented a projected one-year return of 79.4 per cent.