Harvest Health & Recreation has a 184 per cent upside, Beacon Securities says

US cannabis company Harvest Health & Recreation (Harvest Health & Recreation Stock Quote, Chart CSE:HARV) is a standout when it comes to winning licenses in competitive markets, says analyst Russell Stanley of Beacon Securities, who on Friday initiated coverage of HARV with a “Buy” rating and C$23.00 target price, representing a projected 12-month return of 184 per cent at the time of publication.

Arizona-based Harvest operates cultivation, production and cannabis retail facilities, currently with interests in 12 states and a total of 147 licenses, including 86 for retail operations.

In his coverage launch, Stanley notes that the company’s market selection is laudable and includes major population centres like California and Florida as well as Michigan, Maryland, Pennsylvania and Massachusetts.

“What stands Harvest apart from many of its peers is its demonstrated success in winning merit-based licenses in highly competitive markets, having obtained licenses in over 90 per cent of the states where the company has applied,” he writes. “We believe investors should prioritize companies that are strong in this regard. While acquisitions may grab headlines (and HARV pursues them too), de novo licensing wins can generate vastly superior returns on capital.”

Stanley also emphasizes the fact that US cannabis companies are still trading at a steep (69 per cent) discount to their Canadian peers, a gap which Stanley says will inevitably narrow as policies in the United States become more pot-friendly. The analyst notes that currently every single presidential candidate has publicly stated support for some type of cannabis reform, including President Donald Trump who has committed to supporting congressional efforts to protect states rights on cannabis.

“Reform is coming,” says Stanley. “The question now is who will drive it, when will it happen, and what form will it take. Progress on this front should significantly reduce the valuation discount, allowing for a rerating for companies like Harvest.”

Stanley values HARV using a 30x multiple of his EV/2020 EBITDA estimate applied to his attributable EBITDA 2020 forecast of $171 million. He says that the multiple represents a 14 per cent discount to the 35x average among companies with a C$1 billion market cap or greater. (All figures in US dollars unless noted otherwise.)

Stanley expects HARV to generate attributable EBITDA in fiscal 2019 of $46 million on revenue of $183 million and attributable EBITDA in fiscal 2020 of $171 million on a top line of $521 million.