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Skylight Health has an 88 per cent upside, says Echelon Capital

Skylight

Echelon Capital Markets analyst Rob Goff is staying positive on Skylight Health Group (Skylight Health Group Stock Quote, Chart, News, Analysts, Financials TSXV:SHG), maintaining a “Speculative Buy” rating while lowering his target price to $8.00/share from $10.50/share in an update to clients on August 18.

Founded in 2014 and headquartered in Mississauga, Skylight Health Group is a healthcare services and technology company with a network of physical multidisciplinary medical clinics and virtual telehealth services for over 120,000 patients in Canada and the United States.

Goff’s updated analysis comes after Skylight reported its second quarter financial results, which Goff noted to be solid and in line with expectations.

“We were encouraged by the organic growth of about 13 per cent quarter-to-quarter from existing Primary Care Clinics within the quarter as management gave credit to improved revenue cycle management, provider access and patient flow practices,” he said.

Skylight Health Group reported $10.5 million in revenue for the quarter, a 184 per cent year-over-year increase and a 103 per cent quarter-to-quarter jump driven by organic growth and acquisitions, including the Rocky Mountain group of healthcare clinics in Colorado bought in April for $13.5 million, as well as the acquisition of ACO Partners LLC, which provides Skylight a national contracting platform, direct CMS contracting for traditional medicare, and additional future acquisition opportunities.

The result was in line with the consensus projection of $10.3 million and slightly below the Echelon estimate of $10.8 million, while the 64.1 per cent gross margin came in below the consensus projection of 67.3 per cent and the Echelon estimate of 68 per cent.

On account of an investment into Value-Based Care (VBC), Skylight’s adjusted EBITDA for the quarter came in below Echelon’s expectations, with the $1.5 million loss off the initial estimation of a $28,000 positive adjusted EBITDA.

While the Rocky Mountain acquisition played a role in the company posting a $3.5 million net loss from operations in the quarter, the company still has an $11.8 million cash balance.

“We are excited that we achieved our largest revenue quarter in the history of the Company.  The second quarter continued the transformative growth that started in the first quarter of this year,” said Prad Sekar, CEO of Skylight Health in the company’s August 16 press release.

“We’ve identified two key growth areas that will remain a focus for the last half of the year and onwards: the growth through strategic acquisitions and the participation of value-based care under the Medicare Shared Savings program for our traditional Medicare patients beginning in 2022,” Sekar said.

The quarterly numbers have prompted Goff to revise his future financial metrics, as he now projects revenue for the third quarter ($12.1 million) and fourth quarter ($12.8 million) to come in slightly below his previous estimates, leading to a revised revenue projection of $40.6 million for 2021, down from his initial estimate of $42.2 million while still representing a 210 per cent year-over-year increase. He then projects 2022 revenue to come in at $53.5 million, marking a 31.8 per cent year-over-year increase.

Goff is also expecting negative EBITDA reports for the remainder of 2021 ($1.3 million projected loss in the third quarter, $1 million in the fourth quarter) to post a projected total loss of $5.2 million for the year before rebounding to a $200,000 projected loss for 2022.

However, Goff still holds a more optimistic view than the consensus in relation to the company’s valuation data, projecting EV/Revenue to be 3.7x for 2021 in contrast to the target of 7.8x and the consensus estimate of 11.3x. Goff then projects a drop to 2.8x for 2022, below the target of 3.8x and completely different from the consensus estimate of 64.9x.

The EV/Gross Profit multiple is viewed similarly, with Goff projecting 5.7x for 2021 compared to the consensus estimate of 11.3x and the target of 12x. 2022 forecasts see Goff projecting a 4.3x multiple for 2022 compared to the target of 5.9x and the consensus estimate of 6.9x.

Overall, Goff believes the company is still in good shape with the VBC model coming in, with revenue pushed forward into the future.

“We understand that VBC cost savings payments are typically paid up to six months after the calendar year in which the visits take place as it takes time for the CMS to reconcile costs and in turn for savings to be paid out to VBC providers,” he said. “We look for Skylight to introduce deferred revenue on its balance sheet in 2022 that will provide investors with a preview of the full in-quarter revenue generation. Skylight will then see 2023 revenues benefit from growing revenues associated with the cost savings component of VBC contracts.”

“We moved to realign our price target with our organic baseline forecasts and against reduced peer valuations,” Goff said. “We look to potentially upgrade our price target with accretive acquisitions representing a prospective source.”

At press time, Goff’s $8.00 target represented a projected one-year return of 88.2 per cent. Overall, Skylight’s share price has declined by 33.3 per cent for the year to date, reaching a high point of $9.25/share on February 18.

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About The Author /

Geordie Carragher is a staff writer for Cantech Letter

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