Green Thumb Industries has big upside, says GMP Securities

Green Thumb Industries (Green Thumb Industries Stock Quote, Chart: CSE:GTII) has acquired one of Nevada’s dominant cannabis industry operators in Integral Associates, analyst Robert Fagan of GMP Securities, who says the $290-million deal could be highly accretive for GTII.

Fagan visited two of Integral Associates’ three dispensaries in the Las Vegas area, which are operated under the retail brand Essence. The analyst said the facilities are strategically located, high-volume stores which could each be generating annual sales in the $25-million range, with Integral’s internally-produced products accounting for 40 to 50 per cent of sales, indicating a good level of vertical integration. (All figures in US dollars unless noted otherwise.)

“We project Essence’s current run-rate sales at ~$70 million and EBITDA at ~$25 million,” said Fagan in an equity research update to clients on Friday. “At $290 million, this suggests GTI paid current valuation multiples of ~11x EV/EBITDA and ~4x EV/sales to acquire Essence. This would be near the top end of the valuation range for past acquisitions in the private cannabis sector, however, we believe this is justified given the high quality of Essence’s assets.”

The analyst says his positive stance toward GTII comes from three main pillars: (1) the company’s operating platforms with exposure to eight states in the US, many of which have relatively high barriers to entry; (2) potential $100- to $200-million upside by 2020 from opioid replacement therapy which is set to run in Illinois, Pennsylvania and New York; and (3) the fragmented US cannabis market is ripe for accretive M&A activity.

With the Integral Associates purchase (estimated to close during the first half of 2019), Fagan has upped his forecasts but not his target price for GTII. He now expects revenue and EBITDA in fiscal 2019 of $213 million and $54 million, respectively, (was $181 million and $44 million) and revenue and EBITDA in fiscal 2020 of $447 million and $174 million, respectively (was $376 million and $149 million).

Fagan is maintaining his “Buy” recommendation and target of C$35.00 for GTII, representing a projected 12-month return of 134 per cent.