iAnthus Capital is undervalued, says GMP Securities

GMP Securities analyst Robert Fagan has initiated coverage of cannabis company iAnthus Capital Holdings (iAnthus Capital Holdings Stock Quote, Chart CSE:IAN) with a “Buy” rating and C$11.00 target price, which represents a projected return of 50.9 per cent at the time of publication.

iAnthus is a US multi-state operator (MSO) with a majority-owned platform across eight states, with 12 stores, 56 store licenses and eight currently operational facilities. Earlier this month, iAnthus completed its previously announced acquisition of cannabis company MPX Bioceutical in an all-stock purchase valued at approximately C$835 million.

Fagan says the MPX acquisition is transformational for iAnthus.

“The transaction has allowed two formerly mid-tier operators to evolve into one of the US cannabis industry’s larger-tier companies,” says Fagan in his coverage launch on Tuesday. “This is underpinned by IAN’s pro-forma platform which features roughly the same number of store licenses, open retail locations, and currently operational production facilities as the average of GTII, HARV, CL and TRUL, whom we consider to be IAN’s closest peer group. We believe IAN’s graduation to a larger-tier operator should lead to a valuation re-rating, with senior operators currently trading at a ~4x turn premium to juniors. Putting the above in context, IAN’s current EV of ~$1 billion is ~50 per cent smaller than its close peer group average of ~$2 billion.”

Fagan’s positive stance is also based on his belief that IAN has demonstrated a smart track record of acquisitions (a total of 18, and all at discounts of between 35 and 40 per cent to the average valuations of deals completed by peers) and IAN’s exposure to potential rec cannabis conversions in the states of New York, New Jersey and Vermont, which the analyst says could translate into approx. $120 million to $200 million of added revenue. (All figures in US dollars unless otherwise noted.)

“We expect IAN’s vertical integration to meaningfully increase going forward,” he says. “This should be driven by substantial capacity increases in New York and Florida and expansion of retail footprints in Nevada and New Jersey. In addition, we expect IAN to be the 2nd largest player in Massachusetts during 2019 allowing the company to capitalize on expected high margin wholesale opportunities, supporting a robust profitability outlook.”

Fagan sees iAnthus generating fiscal 2019 EBITDA of $10.7 million on revenue of $130.5 million and fiscal 2020 EBITDA of $115.1 million on a top line of $319.5 million.