Cresco Labs has a 50 per cent upside, Beacon Securities says

On the back of its announced acquisition of Origin House, US cannabis company Cresco Labs (Cresco Labs Stock Quote, Chart CSE:CL) is getting a target raise from Beacon Securities analyst Russell Stanley, who on Tuesday reiterated his “Buy” rating with the new target price of C$24.00 (previously C$22.00).

Announced on Monday, the C$1.1 billion deal has Origin House shareholders receiving 0.8428 Cresco shares for every OH share, representing C$12.68 per share and altogether amounting to the largest deal in the US cannabis space so far.

Stanley says that Origin House already has strong relationships with a number of brands in California and the acquiring OH will add much-needed distribution capabilities for Cresco in that state, where Cresco has cultivation assets and is working to establish distribution.

“In order to drive sales of its branded products in California, Cresco needs the distribution capability to get its products onto dispensary shelves. OH already distributes products to 500+ dispensaries in CA, giving it an approximate 60 per cent penetration rate,” says Stanley.

The analyst thinks that the transaction will go ahead and moreover that OH assets will begin contributing to Cresco by the third quarter of this year. Stanley predicts that Cresco will generate fiscal 2019 revenue and EBITDA net NCI of $319 million and $62 million, respectively, and fiscal 2020 revenue and EBITDA net NCI of $771 million and $220 million, respectively. (All figures in US dollars unless where noted otherwise.)

Stanley estimates that CL is currently trading at a nine per cent discount to the 22x average multiple of his 2020 EBITDA estimate of its broader peer group and at a 47 per cent discount to the 38x average multiple for companies with a C$1 billion-plus market cap.

Upcoming catalysts for Cresco include the release of its fourth quarter 2018 financials, further M&A activity and additional updates on its buildout into other markets, says Stanley.

The analyst’s C$24.00 price target represents a projected return of 50 per cent at the time of publication.