Harvest Health & Recreation has a 186 per cent upside, says Beacon Securities

After the company’s quarterly results, Beacon Securities analyst Russell Stanley is holding steady with his thesis on US cannabis play Harvest Health & Recreation (Harvest Health & Recreation Stock Quote, Chart CSE:HARV), which he says is trading at a substantial discount to its peer group.

Arizona-based Harvest Health on Friday reported its first quarter 2019, which featured revenue of $19.2 million, a 131 per cent increase year-over-year, and an adjusted EBITDA loss of $4.7 million. (All figures in US dollars unless noted otherwise.)

Those numbers were slightly ahead of consensus as well as Stanley’s estimates at $18.0 million and negative $5.0 million, respectively.

Despite the solid results, the stock dropped on Friday with the broader market selloff, however, along with losses across the cannabis sector. Stanley says the closure of HARV’s $850-million acquisition of Verano is taking longer than expected, with the closing date likely coming in late 2019, according to management, rather than the previously thought first half of 2019.

The holdup is cause for Stanley to reduce his forecast, moving from fiscal 2019 revenue and EBITDA of $238 million and $40 million to $185 million and $29 million. Stanley notes that management has maintained its pro forma guidance, however, still calling for fiscal 2020 pro forma revenue of between $900 million and $1.0 billion.

“The reiteration of pro forma guidance indicates that underlying performance expectations for Verano are unchanged. All that has changed is the date when HARV might begin to consolidate reporting of Verano’s results. As our valuation is based on our fiscal 2020 estimates, which have not changed materially, we reiterate our Buy rating and 12-month target of C$26.00,” says Stanley, in a client update Monday.

The analyst contends that at 10x his fiscal 2020 EBITDA estimate, HARV is now trading at a 49-per-cent discount to the 20x average across its peer group and at a 64-per-cent discount to the 29x average among cannabis companies with a plus-C$1 billion market cap.

As for catalysts, Stanley is looking out for progress on currently pending acquisitions, additional M&A activity, updates on the retail buildout and the next quarterly report due in August. His C$26.00 target represented a projected return of 186 per cent at the time of publication.