Skylight Health is still a pass, says Raymond James

Raymond James analyst Rahul Sarugaser gave an update on Friday on primary clinic and healthcare tech company Skylight Health Group (Skylight Health Group Stock Quote, Charts, News, Analysts, Financials TSXV:SLHG), saying the stock is still a wait-and-see project pending results of a shift in revenue profile. Sarugaser reiterated a “Market Perform” rating on SLHG while lowering his target price from C$3.25 to C$2.00, which at press time represented a projected one-year return of 212.5 per cent.

Skylight is a Toronto-headquartered healthcare services company operating a multi-specialty primary healthcare network, one which has been expanding both in terms of clinic numbers and expansion of data-driven services including Electronic Medical Records (EMR), remote healthcare and telemedicine. 

Skylight Health Group started off as CB2 Insights in 2014 in electronic data collection and patient management aimed at integrating the growing medical cannabis industry and practice with traditional clinical care. The company then began acquiring its own group of clinics in the United States as of 2017 and then in 2020 was rebranded under Skylight, moving to offering multi-specialty healthcare across a network of clinics, involving primary, sub-specialty, allied health and diagnostics.

The company also has a research arm, with Skylight giving an update on Skylight Health Research last week, saying so far it has been awarded 11 clinical studies and has completed four, with total revenue earned through the studies in 2021 of $300,000. The company said it has recently established two partnerships with Elligo Health Research (which recently acquired Skylight collaborator ClinEdge) and Endominance, with whom Skylight is assisting in recruitment for an anxiety study.

In his new update, Sarugaser said Skylight is at a point of transition where it’s aiming to move from an inorganic to organic growth model, pointing to its Fee-for-Service (FFS) and Capitated revenue lines, with the latter referring to set payments per patient enrolled in a said program, regardless of whether or not that patient is given care over a given period of coverage.

“This quarter, SLHG added new reporting lines for FFS and Other Revenue (including clinical research Revenue), and Capitated Revenue, which should enable us to keep tabs on SLHG’s transition from an FFS model to a capitated one. We update our models to break out these segments, and we conservatively assume growth will be driven, principally, by organic growth during the balance of FY22 and the entirety of FY23. We anticipate FFS Rev. will taper down meaningfully in the medium-term, with capitated revenue more than compensating as SLHG converts patients to its risk-bearing, capitated model,” Sarugaser wrote.

Sarugaser has updated his estimates on Skylight and is now calling for third quarter revenue of $20 million (previously $25 million) and fourth quarter revenue of $20 million (previously $26 million). For the full 2022 and 2023 years, the analyst is forecasting revenue of $64 million and $85 million, respectively, and EBITDA of negative $18 million and negative $12 million, respectively. 

“Through participation in the ACO Reach program for 2023, SLHG with its JV partner CHS/Centene aims to engage actively in the 8-week Medicare Advantage enrolment period beginning Oct. 15, 2022, which, if successful, should be a material step toward SLHG shifting its patient base from FFS-based lives under traditional Medicare to global capitated risk-based lives under Medical Advantage,” he wrote.

Sarugaser said he will be looking closely at Skylight’s progress on the Medical Advantage enrolment program and is waiting for updates before modelling a revenue ramp.

On the stock, Sarugaser said the overall healthcare services sector has rebounded slightly, which has led to a change in his valuation on SLHG, which now uses a 3.0x 2022 EV/Revenue multiple as opposed to the previous 1.5x. 

Skylight Health saw its share price hit a peak of around $9.00 as of February, 2021, but the fall has been precipitous over the ensuing year and a half. SLHG broke below $1.00 per share in May and has been trading since then in roughly the $0.60-$0.80 range.

Sarugaser said given the sentiment in the sector he is maintaining his “Market Perform” rating.