Full steam ahead for Skylight Health, says Echelon

Echelon Capital Markets analyst Rob Goff finds the sky may, in fact, have a limit for Skylight Health Group (Skylight Health Group Stock Quote, Chart, News, Analysts, Financials TSXV:SHG), maintaining a “Speculative Buy” rating while lowering his target price from $8.00/share to $7.00/share in an update to clients on Monday.

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

Goff’s report comes after Skylight announced it had entered into an agreement with New Frontier Data to divest all of its assets related to Canna Care Docs and Relaxed Clarity, which specialize in providing clinical evaluations, recommendations, and education for patients seeking medical cannabis for state regulated conditions, for a total cash consideration of US$8.628 million.

“We believe the divesture of Skylight’s legacy medical cannabis business strengthens the Company’s position to attract US equity investors and debt financing,” Goff said. “Furthermore, Skylight’s exclusive focus on primary care will foster stronger relations with the federally backed Medicaid/Medicare and insurance providers, as it prepares to introduce its VBC platform.”

According to the company’s release about the divestiture, payment terms will include cash on closing of US$4,000,000, with the remainder of the balance paid over three installments at 12 months, 18 months and 24 months from the date of closing, with Skylight then being expected to use the cash proceeds to further acquire primary care practices in its pipeline, which Goff notes to be robust with the potential to replace the legacy business revenue within six months.

“This is an important move forward for all team members of Skylight Health Group,” said Prad Sekar, CEO of Skylight Health in the company’s October 29 press release. “This transaction cements our full commitment towards setting aside medical cannabis and focusing on value-based care as we continue to acquire primary, urgent and specialty practices in the United States.”

In addition, the company has recently made a pair of key changes to its executive team, first hiring Mohammad Bataineh, a 25-year industry veteran in primary care, healthcare M&A, integrations, legal and operations, as the company’s new President on August 26, then adding Greg Sieman, who was most recently the chief revenue and communications officer at Lifespace Communities, as its new senior vice president of marketing and communications on October 12.

The divestiture news has prompted slight changes to some of Goff’s financial projections for the company. Though his 2021 revenue and gross profit estimates remain at $41.4 million and $26.7 million respectively, his 2022 estimates have been lowered to $54.1 million in revenue (previous target $56.7 million) and $32.7 million in gross profit (previously $35.9 million).

Goff’s EBITDA projection has also shifted slightly in 2022, as he now projects a $4.1 million EBITDA loss compared to the initial $1.5 million estimate, while still projecting a $5.1 million EBITDA loss for 2021.

However, even with the drops, the company still performs favourably to its peers by valuation standards, with Goff projecting the company’s EV/Revenue multiple to tumble from 11.4x in 2020 to a projected 3.6x in 2021, ahead of the peer group average of 4.4x and the target of 5.4x. Though the 2022 multiple for Skylight is projected to drop to 2.8x, the peer group average drops even lower to a projected 2.6x, though Skylight still outperforms the 2022 target of 5.4x in these estimates.

Goff’s EV/Gross Profit multiple projections also present Skylight favourably, as he estimates the 2021 multiple for the company to be 5.6x to beat the peer group average of 7.7x and the target of 10.9x, then projects to drop further to 4.6x in 2022, again beating the peer group average of 4.8x and the target of 8.9x.

Though the legacy business divestiture may have a more adverse effect on near-term initiatives, Goff believes the move was necessary in the name of building out the primary care/VBC business in order to yield margin expansion under the cost of care model in the years to come.

“We view the announcement positively as the prospective sale of the legacy business was increasingly viewed as an overhang and impediment to Skylight advancing its VBC primary care strategy,” Goff said. “Despite taking a positive view on the transaction, we elected to trim our PT by $1.00 as we await execution against the Company’s acquisition pipeline, while recognizing the current ‘show me’ market for the digital health space.”

Overall, Skylight’s stock price is down 43.1 per cent for the year to date, reaching a high point of $9.25/share on February 18 and recently bottoming out at $2.60/share on October 6. At the time of publication, Goff’s $7.00 target represented a projected one-year return of 87.2 per cent.