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Skylight Health is more than a triple from here, says Echelon

The share price for Skylight Health Group (Skylight Health Group Stock Quote, Charts, News, Analysts, Financials TSXV:SLHG) has fallen hard over the past two years, but there should be better days ahead, according to Echelon Capital Markets analyst Rob Goff, who delivered an update to clients on SLHG on Monday. The healthcare services and technology company just announced a capital raise which should go a long way in helping it reach cash flow positive operations, according to Goff.

Headquartered in Mississauga, Ontario, Skylight operates primary healthcare clinics in the United States, owns a proprietary electronic medical records system and runs a subscription-based telemedicine platform. The company announced on Friday a strategic commitment of $5 million in convertible debentures from an unnamed US multi-billion dollar, growth-oriented healthcare institutional investment firm. The investment comes in two tranches with the first $3.37 million having been delivered and the second tranche for $1.63 million expected to close within 30 days. (All figures in US dollars except where noted otherwise.)

The investment comes as a zero per cent interest, asset-backed convertible debenture where Skylight has the option to repay the debt at any time, without penalty and regardless of share price. Each debenture holds a principal amount of $1,000 and is convertible into 1,111 common shares of the company at C$0.90 per share, while the holder also receives 1,111 share purchase warrants entitling to purchase shares at $0.90 per share for a period of five years. 

Skylight said the funds will go towards business operations and that the investment has been structured so as to reduce dilution to shareholders while at the same time giving the company a buffer to execute on its business plan.

“We’ve continued to show increased revenue and decreased burn and expect to reach cash-flow-positivity in the upcoming quarters. We are excited to have a strong institutional investor who understands the long-term impact of our opportunity in the value-based care sector within US healthcare,” said CEO and Co-Founder Prad Sekar in a press release.

Once up as high as C$9 as of February 2021, Skylight’s share price dropped sharply over the 2021 year, hitting around the C$1.50 mark by the start of 2022. Since then, SLHG has drifted still lower to where it now resides in the C$0.60-C$0.70 range.

But Goff likes the path Skylight is taking towards becoming a profitable value-based care (VBC) provider. With the update, Goff reasserted a “Speculative Buy” rating on the stock and C$2.00, which at the time of publication represented a projected one-year return of 212.5 per cent.

Goff pointed to recent M&A moves in the United States as indication of the momentum behind the VBC model, which ties healthcare delivery to patient health outcomes. On the announced capital raise, Goff said it will help bridge Skylight toward its target of profitability and positive cash flow as some point in 2023. 

“We view the strategic investment as further evidence that Skylight’s transition to value-based care (VBC) is welcomed not only by payors and the US healthcare system but investors,” Goff said in his report. 

“We’ve seen evidence of this with Amazon’s announced acquisition of VBC provider One Medical for ~$3.9 billion in July (representing a 2.8x 2023 EV/revenues multiple on a -7 per cent consensus EBITDA margin, against Skylight’s current 0.5x 2023 multiple on our -2 per cent forecasted EBITDA margin) and then CVS Health’s acquisition of VBC provider Signify Health for $8.0 billion in September (representing an ~7.7x 2023 EV/revenues multiple on a 31 per cent consensus EBITDA margin),” Goff wrote.

Goff said at first glance the debenture arrangement seems to come with a steep dilution tradeoff of about 15 million additional shares, which would represent about 38.5 per cent of SLHG’s current 39.8 million shares outstanding. But the analyst said Skylight’s outstanding receivables from its legacy assets, sold last October and amounting to $4.6 million still owed at the 12, 18 and 24-month anniversaries, are likely to be used to pay down the debentures prior to any future equity conversion. At the same time, Goff noted that the warrants attached to the capital raise still represent a potential dilution of about 7.7 million shares but that they will also contribute a potential $6.9 million in cash at the conversion price of $0.90.

“We believe the potential dilution is a relatively small price to pay in current market conditions for a significant injection of cash while the Company is executing on its pivotal shift into VBC,” Goff wrote.

Estimated to be currently trading at 0.5x 2023 EV/Revenue, Goff said Skylight’s peers in the US VBC portion of the US Digital Health Peer group in One Medical, Oak Street Health and agilon health are trading at 2.4x, 1.7x and 2.0x, respectively. In Canada, Canadian Digital Health Peers are trading at 1.0x 2023 EV/Revenue.

Looking ahead, Goff thinks Skylight will generate full 2022 revenue and adjusted EBITDA of $60.0 million and negative $18.9 million, respectively, and 2023 revenue and EBITDA of $83.1 million and negative $1.7 million, respectively.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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