Buy Harvest Health stock for big upside: GMP

Subdued margins may persist over the second half of the year for Harvest Health (Harvest Health Stock Quote, Chart, News CSE:HARV), according to GMP Securities’ Robert Fagan.

Harvest Health stock gets price target trimmed

But the analyst thinks that the outlook for 2020 is still strong. In an update to clients on Friday, Fagan maintained his “Buy” recommendation with the reduced target price of C$17.50 (previously C$18.50).

Arizona-based multi-state cannabis operator Harvest Health announced its second quarter 2019 financials on Thursday, featuring total revenue of $26.6 million, a 39-per-cent increase compared to $19.2 million the previous quarter. The company’s net loss was $20.6 million for the Q2, which the company says is reflective of its planned investments. (All figures in US dollars unless noted otherwise.)

“During the second quarter, Harvest continued to execute on its strategy by adhering to our four core initiatives: building a world class team, expanding our retail and wholesale footprint across the U.S., building and acquiring brands and distributing them across our footprint and continuing on a path of profitable growth we believe that we can fulfill our objective of becoming the most valuable cannabis company in the world,” said CEO Steve White in the quarterly press release.

By the quarter’s end (June 30), Harvest operated 16 retail locations, up from 13 by the end of Q1. Since June, Harvest has added six more stores, saying that there will be more cultivation, manufacturing and retail expansion for the rest of 2019, with the guidance of about 60 stores opened by the end of the year.

Fagan described the Q2 numbers as mixed, with the $26.6 top line coming in-line with his forecast of $26.9 million and the consensus $26.4 million. But adjusted EBITDA (excluding biological assets) came in as a loss of $14.1 million, which was lower than both Fagan’s negative $4.1 million forecast and the Street’s negative $6.7 million.

The analyst characterized Harvest’s store growth over the quarter as somewhat limited but is expecting more coming soon in both Pennsylvania and Ohio once discussions with regulators conclude.

Fagan said Harvest’s quarterly margin was impacted by capacity constraints, mainly in Arizona where the company was sourcing wholesale supply to supplement its own production. The slower closing of acquisitions and delays in store openings could keep margins lower for the rest of the year, he says.

Still 168% upside in HARV, Fagan says…

“Despite some short-term delays for parts of HARV’s operations, we believe the company’s proforma performance is impressive with pending acquisitions growing sales by ~60 per cent sequentially for Q2. As a result, HARV’s proforma platform is currently generating more than $310 million of annualized sales, ranking the company among the top three largest MSO’s in the industry by revenue. With key acquisitions set to close by year end, store growth to accelerate in Q4, and ~$200 million of deployable cash on the balance sheet, HARV’s 2020 outlook remains strong in our view,” writes Fagan.

Fagan thinks HARV will generate fiscal 2019 EBITDA of negative $23.4 million on revenue of $142.1 million and fiscal 2020 EBITDA of $248.9 million on a top line of $786.0 million. His C$17.50 target is based on a 20x multiple of his 2020 EBITDA forecast plus $130 million of EBITDA he assumes is acquired. The target represents a projected return of 167.6 per cent at the time of publication.