Skylight Health has target reduced by Echelon

Echelon Capital Markets analyst Rob Goff is being a little more cautious in regards to Skylight Health Group (Skylight Health Group Stock Quote, Chart, News, Analysts, Financials TSXV:SLHG), having maintained a “Speculative Buy” rating but reducing his target price from $3/share to $2/share for a projected return of 150 per cent in an update to clients on Wednesday.

Mississauga-based 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 released its first quarter financial results for the 2022 fiscal year, with Goff attributing his target drop to additional cost of capital increases, pressures on digital healthcare valuation multiples, market expectations on profitability and downward revisions to near-term forecasts for Skylight’s legacy fee-for-service (FFS) business.

“While bullish on the mid- to longer-term value proposition, we are adopting a more conservative near-term outlook,” Goff said. “In different market conditions, the strategic merits and operating potential of Skylight’s NMD acquisition would represent a significant accretion to shareholder value. However, with the current market focus on timelines across peers for turning EBITDA positive, we highlight a heightened execution and in turn, capital cost discount.”

Skylight Health’s financial quarter was headlined by $7.7 million in revenue for year-over-year growth of 54.6 per cent, though that number is a slight miss in relation to both the Echelon projection of $7.9 million and the consensus expectation of $8.1 million. Goff attributed the 18 per cent sequential drop to the implementation of a new electronic medical record (EMR) system and the reduction in urgent care visits as COVID-19 cases decrease within the Company’s markets.

However, Goff also noted that the company forecasted a $70 million annual revenue run rate following its acquisition of Florida-based NeighborMD, which was completed on May 6 for US$8 million and is expected to add over $35 million in topline revenue along with over 5,000 patient lives.

Skylight reported gross profit of $3.4 million to miss in relation to the Echelon estimate of $4.4 million and the consensus expectation of $4.5 million, while adjusted EBITDA was also a miss at a loss of $6.7 million against the Echelon estimate of a $5.5 million loss and the consensus expectation of a $5.9 million loss.

“As we continue to focus on integration and leveraging the revenue and cost synergies between our assets, we are very focused on a pathway to profitability,” said Prad Sekar, CEO and Co-Founder of Skylight Health in a May 16 press release. “Based on performance today, the practices remain profitable from an operating model. Corporate and administrative expenses related to the public market listings and integrations have been the primary contributors to a negative EBITDA, and we have since seen the majority of these costs decrease over the past few months.”

In order to account for the NeighborMD acquisition, Goff has revised his 2022 financial expectations for Skylight Health, raising his revenue estimate from $36.5 million to $59.3 million for a potential year-over-year increase of 57.1 per cent, which comes in a step ahead of the consensus projection of $52.1 million. Looking ahead to 2023, Goff projects revenue of $82.3 million for a year-over-year increase of 38.7 per cent.

From a valuation perspective, Goff forecasts Skylight’s EV/Revenue multiple to drop from the reported 1.4x in 2021 to a projected 0.9x in 2022, then to 0.6x in 2023 to come out ahead of the 1.2x target, as well as presenting a discount to the peer average of 1.5x.

Despite the revenue increase, Goff sees a significant tightening of the company’s gross margin for 2022, with the $18.1 million gross profit projection (down year-over-year from $23.2 million in 2021) implying a margin of 30.5 per cent. Looking ahead to 2023, Goff forecasts $27.1 million in gross profit, resulting in a slightly wider gross margin call of 32.9 per cent.

Accordingly, Goff forecasts an increase in the company’s EV/Gross Profit multiple from the reported 2.2x in 2021 to a projected 2.8x in 2022 before dropping to a projected 1.9x in 2023, slightly ahead of the peer group average of 2.5x and a significant discount to the 3.7x target.

Meanwhile, Goff continues to forecast further losses on adjusted EBITDA, as he projects an $18.7 million loss in 2022 followed by a $5 million loss in 2023.

Looking ahead, Goff believes Skylight investors will need to be patient with the company as it continues its transition toward value-based care.

“The company has made significant infrastructure investments ahead of its entry, though Skylight expects its cost profile to be significantly reduced over the next 6-12 months while expecting consistent incremental improvements quarter-to-quarter,” Goff said.

Skylight Health’s stock price has slumped to a 53 per cent loss since the start of 2022, having started the year at a high point of $1.68/share and getting close to being even on March 26 at $1.66/share, though it presently trades at a 2022 low of $0.79/share.