Curaleaf has a 60 per cent upside, says Beacon Securities

Analyst Russell Stanley with Beacon Securities gives the thumbs up to a new deal by Curaleaf Holdings (Curaleaf Holdings Stock Quote, Chart CSE:CURA) which will see it purchase Ohio Grown Therapies for $20 million, saying in a client update on Monday that the move to expand its presence in Ohio is a positive.

US cannabis play Curaleaf announced on Monday that it has a definitive agreement to acquire Ohio Grown Therapies and its medical cannabis cultivation and processing licenses along with a 32,000 square foot facility currently under construction.

“This transaction is reflective of our strategy to become vertically integrated with a focus on limited license markets. As the seventh most populous state in the country, Ohio is an emerging cannabis market with strong growth potential and we plan to continue pursuing opportunities that increase our exposure to this expanding customer base,” said CEO Joseph Lusardi in a press release.

Stanley notes that Ohio opened its first dispensary in January and that there are now only 15 retail outlets currently with operation certificates.

“The state awarded just 56 dispensary licenses in 2018, out of 375 applications, which illustrates how highly coveted this market is for many cannabis companies. Just two processing companies have obtained certificates of operation, which bodes well for pent up demand for CURA to sell into once its operations are online,” says Stanley.

“We are leaving our estimates/valuation unchanged, although we see the upstream expansion in OH as positive. CURA already has its own processing license in OH, so this transaction adds a 2nd processing license, but also represents expansion into cultivation. CURA traditionally targets vertical integration in each market, so we expect the company to pursue retail opportunities in OH, where available,” says Stanley.

The analyst estimates that CURA is now trading at approximately 18x his 2020 attributable EBITDA forecast, which represents a 16-per-cent discount to the 22x average for its broader peer group and a 61-per-cent discount to the 47x average for companies with market caps above C$1 billion. Stanley sees potential CURA catalysts in its Q1/19 financials to be delivered later this month, the closing of the transaction for its Nevada purchase of Acres Cannabis, progress on its Oregon-based Select acquisition and additional buildout and M&A news.

Stanley sees CURA generating 2019 managed revenue of $439 million and Attributable EBITDA of $69 million. (All figures in US dollars unless noted otherwise.) He is maintaining his “Buy” recommendation and C$23.00 target price, which represents a projected return of 60 per cent at the time of publication.