With cannabis companies operating in the United States currently trading at a huge discount to their Canadian counterparts, the time is right to invest in Illinois-based Green Thumb Industries (Green Thumb Industries Stock Quote, Chart CSE:GTII), says analyst Russell Stanley of Beacon Securities, who initiated coverage on Thursday with a “Buy” rating and 12-month target price of C$32.00.
Founded in Chicago in 2014, Green Thumb is a vertically integrated cannabis company with cultivation, production and retail businesses in the US. The company started trading on the CSE on June 13 and will be releasing its third quarter financials in November.
GTII’s Q2 results reported contributions from five states, with Stanley saying that the company’s transaction pipeline looks deep, as it’s currently working to close acquisitions in Florida, Pennsylvania, Maryland and New York. The analyst thinks that Green Thumb will have interests in eight states by the end of 2018.
“With the recently announced acquisition of PharmaCann by MedMen Enterprises, we believe the M&A environment in the United States has heated up considerably,” says Stanley. “This should support Green Thumb’s efforts by driving more would-be sellers to market, and we cannot rule out the possibility that GTII would become a target as well.”
Yesterday, Green Thumb announced the closing of a C$101.66 million bought deal financing round with lead underwriter GMP Securities and including Beacon Securities, Cormack Securities, Echelon Wealth Partners and Eight Capital.
Stanley figures that GTII’s broad peer group in the Canadian cannabis space trades at approximately 164x EV/2019 EBITDA, while the US peer group trades at 27x, and, notably, that difference has widened of late. Stanley values Green Thumb using a 26x EB/2020 EBITDA multiple, which represents a 12 per cent premium to the 23x multiple attributed to competitor MedMen Enterprises (CSE:MMEN) and a 58 per cent discount to the 63x multiple at which companies with over $1 billion market capitalization trade.
On the difference between Canadian and US cannabis companies, Stanley says, “We view this discount as unsustainably high and expect multiples to converge as investors will eventually realize that US operating companies generally offer investors more established business models with far broader product suites and greater participation throughout the value chain (cultivation, manufacturing/production and retail).”
“The only rational reason we see for any discount is cannabis’ current federal status in the United States. However, given the increasing voter support for legalization in the US, and President Trump’s commitment to back congressional efforts to protect states that have legalized cannabis, we believe the real risk of federal interference has declined materially since last April. Despite these developments, the discount at which US operating companies trade has actually increased. This disconnect creates a significant opportunity for investors,” he says.
Stanley’s C$32.00 target represents a projected 12-month return of 40 per cent at the time of publication.