Take a pass on Skylight Health, says Raymond James

Raymond James analyst Rahul Sarugaser is staying on the sidelines regarding Skylight Health Group (Skylight Health Group Stock Quote, Chart, News, Analysts, Financials TSXV:SLHG), maintaining a “Market Perform 3” rating and $2.50/share target price for a projected return of 89.4 per cent in an update to clients on Tuesday.

Skylight Health Group operates a multi-state primary care health network of clinics providing a range of services from primary care, sub-specialty, allied health, and laboratory and diagnostic testing. Sarugaser’s latest analysis comes after Skylight Health Group announced the acquisition of NeighborMD, which has Sarugaser cautiously optimistic.

“We view today’s announcement as a material positive for SLHG, but much has to go right for SLHG to benefit, fundamentally, from it,” Sarugaser said. “Now, SLHG has the opportunity to show its talents in integrating relatively large businesses, in driving profitability, and in executing against full risk VBC contracts.”

The transaction carries a US$8 million price tag and will see Skylight integrate NeighborMD’s nine primary care fee-for-service clinics in Florida, some of which carry big MediCare Advantage contracts with large payors, along with bringing in US$35 million in TTM revenue, which Sarugaser notes will roughly double Skylight’s annual run rate.

The deal will be financed with debt in the form of a US$20 million credit facility over a three-year term with an annual coupon at SOFR plus 11 per cent paid in cash repayable at any time; the outstanding amount following the NeighborMD transaction will also be available for future acquisitions.

“We are excited to be able to soon welcome NMD and its team to Skylight and bring significant growth and opportunities to our organization and shareholders in less than a year of our NASDAQ debut,” said Prad Sekar, CEO of Skylight Health in the company’s May 3 press release. “With the recent announcement of our JV with CHS, this acquisition will significantly accelerate our entry into full risk in 2022, as originally planned for 3-5 years out. The experience, knowledge, and capabilities that will join Skylight from the team at NMD and our JV, allow us to see a pathway for significant growth organically, and validation for our disciplined acquisition strategy.”

NeighborMD has established a network of over 5,000 patients in central and southern Florida, of which over 1,100 full-risk Medicare Advantage lives under contracts with Humana and Careplus, which generate between US$10,000 and $12,000 per member in annual reimbursement.

In addition, another 1,400 patients in the network represent Medicare Advantage lives under complete management services by NeighborMD, through affiliates.

“Should the transaction close as described, SLHG will be strongly positioned in the FL market with NMD’s in-place suite of clinics and solid base of high-value MA contracts alongside SLHG’s current operations across Florida,” Sarugaser said. “SLHG also indicated that it is now poised to (patiently) execute on a pipeline of FL-based acquisitions, driving growth in its portfolio of Medicare and MA lives managed.”

In addition, Skylight plans to continue making inroads in Florida through its joint venture with Collaborative Health Systems, a subsidiary of Centene, which will have its first material client for management of full-risk contracts in NeighborMD, which allows for increased efforts to add accruing and managing Medicare and MA lives on top of the previous goal of acquiring positive EBITDA FFS clinics and materially increase their per-patient economics by transitioning them to risk-bearing VBC contracts.

Sarugaser acknowledged that the transaction is a deviation from Skylight’s typical transaction model but he remains positive about the deal overall.

“We are cautiously optimistic that SLHG’s recent announcements are leading indicators of material fundamental momentum, but we reserve our full enthusiasm until we see this momentum precipitate in the form of revenue and, importantly, positive EBITDA,” Sarugaser said. “While this transaction is, indeed, deeply discounted, we acknowledge that NMD is presently loss-making, and SLHG’s capacity to drive businesses to profitability during the integration process is largely untested.”

Sarugaser forecasts Skylight to wrap up its 2021 fiscal year with $40 million in revenue for a 207.7 per cent year-over-year increase, and he expects the momentum to continue into 2022 with a projection of $48 million for a potential year-over-year increase of 20 per cent.

From a valuation standpoint, Sarugaser forecasts the company’s EV/Revenue multiple to drop from the reported 5.1x in 2020 to a projected 1.6x in 2021, then to a projected 1.4x in 2022.

Meanwhile, Sarugaser continues to forecast EBITDA losses for the company, with an $8 million estimate set for 2022 and a $3 million loss projection in place for 2023.

Skylight Health’s stock price has slumped to a 27.4 per cent loss since the start of 2022, dropping to a 2022 low of $0.96/share on April 28 after starting the year trading at $1.68/share.