Skylight Health Group is now a Buy, says Research Capital

Research Capital analyst Yue (Toby) Ma has upgraded Skylight Health Group (Skylight Health Group Stock Quote, Chart, News, Analysts, Financials TSXV:SLHG) from “Hold” to “Speculative Buy” in an update to clients on Monday, saying investors should take advantage of the stock’s favourable risk/reward position. Along with the new rating, Ma reduced his target price on SLHG from $4.80/share to $3.20/share for a projected return at the time of publication of 94 per cent.

Founded as CB2 Insights Inc. in 2014 and headquartered in Mississauga, Skylight Health Group is a healthcare services and technology company, operating a multi-state primary care network throughout the United States, a proprietary electronic health record system and a subscription-based telemedicine service for the un/under-insured population.

Having previously downgraded the stock on September 17, Ma’s updated rating and target come with a belief that Skylight is in an attractive position in the middle of a transition phase, though the lower price is on account of overall industry performance.

“We are using a lower multiple as valuations of both primary care and Canadian healthcare services sectors continue being weak,” Ma said.

Skylight’s business focus has been on shifting toward a value-based care model, having partnered with a leading national healthcare organization who is a recipient of a Direct Contracting Entity license in October, with participation effective as of January 1, one of two value-based care programs Skylight participates in.

All told, Skylight has a roster of nearly 100,000 primary care lives – among which 13,000 are considered Medicare and Medicare equivalent lives, meaning they are either traditional Medicare patients or patients eligible for Medicare Advantage, Medicaid and/or other value-based care arrangements.

The company has been working toward bringing some extra cash into the fold, having closed on December 7 on the raise of US$5.8 million through the issuance of 275,000 shares of 9.25 per cent Series A redeemable preferred shares at a price of US$21/share.

The end of 2021 also saw Skylight complete its divestiture of its legacy business and Canna Care Docs to New Frontier Docs for total cash considerations of US$8.63 million, further cementing the company’s shift toward value-based care. In total, $4 million in cash was due at closing, with the remainder to be paid out after 12, 18, and 24 months.

“We remain proud of the work we achieved together as a team in building the legacy business; this move forward is critical towards building our primary and value-based care business in the United States,” said Prad Sekar, Skylight’s Chief Executive Officer in the company’s December 15 press release. “Fee-for-service (FFS) primary care providers are facing enormous challenges in terms of increased costs and competition while concurrently trying to navigate a move towards value-based care. Skylight Health Group is well positioned to support, navigate, and lead alongside physician-owned primary care practises toward a radically changing primary care market.”

Management previously noted it would use the proceeds from the two transactions to acquire additional independent primary care practises in existing markets to increase the company’s market density, according to Ma.

Looking forward, Ma projects slight revenue growth for Skylight in his financial analysis, beginning with a spike to a projected $50.5 million in revenue for 2022 for a potential year-over-year increase of 26.4 per cent, then levelling out to minimal growth rates through 2025, projecting $51.5 million in 2023 (two per cent year-over-year increase), $52 million in 2024, and $52.5 million in 2025.

Accordingly, Ma projects a relatively stable P/Sales multiple for the same time period, dropping from 1.8x in 2021 to a projected 1.4x in 2022, remaining there through 2023 and 2024 before dipping to a projected 1.3x in 2025.

Ma noted that the current revenue models do not make any assumptions of value-based care revenues as Research Capital awaits management’s guidance.

Meanwhile, Ma also projects the company’s adjusted EBITDA losses to drop moving forward, projecting a shift from a $7.9 million loss in 2021 to a forecasted $3 million loss in 2022, then dropping to a projected $2.7 million annual loss from 2023 through 2025.

As Skylight continues its shift from fee-for-service to value-based care, Ma poses a number of questions for investors to consider.

“(i) How are those 13,000 patients distributed into traditional Medicare, Medicare Advantage, commercial and Medicaid? (ii) How many of those 13,000 patients can be enrolled to the MSSP and DC programs, respectively? (iii) How fast can they be enrolled? (iv) How would revenues from the two VBC programs be recognized on SLHG’s income statement? (v) What is the per patient revenue like under the DC program? (vi) What are potential pushbacks from patients while converting them from FFS to VBC? (vii) What are potential challenges SLHG could face in operations while converting patients from FFS to VBC?” Ma wrote.

Skylight’s stock price has dropped by 72.1 per cent over the last year, with a 52-week high of $9.25/share coming on February 18, before gradually dropping off to its present value of $1.63/share, which is a 52-week low.