Skylight Health is heading to $2.00, says Echelon

Echelon Capital Markets analyst Rob Goff reviewed the latest quarterly results from Skylight Health Group (Skylight Health Group Stock Quote, Charts, News, Analysts, Financials TSXV:SLHG) in a recent update to clients, saying the US-based healthcare services and tech company is showing improved EBITDA margins along with strong organic revenue growth. Goff reiterated a “Speculative Buy” rating in his report along with his C$2.00 target price, which at the time of publication represented a projected 12-month return of 127.3 per cent.

Skylight has medical clinics providing primary care, sub-specialty, allied health and laboratory/diagnostic testing services as well as an Electronic Medical Records (EMR) business to support care delivery through telemedicine and other remote monitoring system integrations. The company also operates through a subscription-based telemedicine service for the under- and uninsured populations. 

Skylight announced its second quarter 2022 financials on August 15, coming in with revenue up 134 per cent year-over-year to $16.1 million and an adjusted EBITDA loss of $5.4 million, a 19 per cent year-over-year improvement. Gross profit was $4.0 million and its net loss was $5.2 million compared to a loss of $4.8 million a year earlier. (All figures in US dollars except where noted otherwise.)

In his quarterly comments, CEO Prad Sekar said he was pleased with the results.

“We set an aggressive plan in Q1 to work on operational efficiencies, right-size costs and make material reductions on our annual cost basis. Exiting Q2 we already forecast a further improved adjusted EBITDA for Q3 as we remain committed to working towards adjusted EBITDA break-even by end of 2022,” Sekar said in a press release.

“Additionally, we accelerated our journey to VBC by 3 years through the acquisition of NMD and our partnership with CHS. It is a proud moment for all of us at Skylight to continue executing in a positive direction even with the headwinds of a macro market and economy. We remain committed to our goals and are beyond excited for the quarters ahead,” Sekar said.

Comparing the results with his forecast, Goff said the Q2 revenue/gross profit/EBTIDA of $14.5 million, $4.3 million and negative $5.4 million, respectively, staked up against his estimates of $12.4 million, $5.3 million and negative $4.4 million, respectively. 

Goff noted that this was the first quarter to include results (for roughly two months) from Skylight’s recent acquisition in value-based care (VBC) company NeighborMD and he added that the results of Skylight’s cost-cutting measures were impressive, with the company reducing operating costs sequentially by about $0.4 million while increasing revenues by about $8.4 million (with the help of NeighborMD. 

“Management also noted that compared with the start of Q222 it had reduced its monthly EBITDA drain by 50 per cent within the quarter. Notably, the Company communicated that excluding the NMD contribution, its legacy fee-for-service (FFS) business slashed its Q122 drain ~$2.3 million q/q to $4.4 million, as cost reductions gained significant traction, while it grew four per cent organically q/q, implying legacy revenues of ~$8.0 million,” Goff wrote in his August 17 report.

Goff said management has laid out clear objectives and has delivered “relatively impressive” second quarter results, helping to begin a trajectory which if followed appropriately could generate “a material, positive revaluation of [Skylight’s] shares.”

Goff had previously reduced his target price from C$3.00 to C$2.00, but he said hitting positive EBITDA would support more aggressive valuation parameters and draw investor confidence.

“Skylight has the financial resources and has significantly invested in the infrastructure to execute on its organic plan. Our forecasts leave a conservative buffer where timelines are stretched, or efficiencies are moderated by higher costs associated with driving growth in VBC. Where targeted performance measures prove optimistic, we see current initiatives raising the value of Skylight as an acquisition candidate. We look for management to remain focused on its organic revenue growth and efficiency drive,” Goff wrote.

As for comps, Goff sees SLHG to be currently trading at 0.6x 2023 EV/Revenue compared to its VBC peers within the US Digital Health sector of One Medical, Oak Street Health and aglion health are trading at 2.4x, 2.3x and 2.3x, respectively.

Looking ahead, Goff is calling for Skylight to hit full 2022 revenue of $60.0 million compared to $37.8 million in 2021 and growing to $83.1 million in 2023. On adjusted EBITDA, the analyst is expecting a move from negative $10.7 million in 2021 to negative $18.7 million in 2022 to negative $1.7 million in 2023.

Currently with a market cap of about $29 million, SLHG shares have sunk from a high of C$9.25 in early 2021 to now C$0.77 per share. Year-to-date, the stock is down about 53 per cent.