Weed stock Vireo Health has a huge upside, says M Partners

Multi-state operator Vireo Health International (Vireo Health International Stock Quote, Chart, News CSE:VREO) is showing tonnes of promise in its buildout across the US, says M Partners analyst Damian Karp.

The analyst delivered a review of VREO’s latest quarterly results on Thursday and reiterated his “Buy” rating and C$9.25 target price, which translated to a projected 12-month return of 387 per cent at the time of publication.

Minneapolis-based Vireo, which has cultivation, extract and retail operations across 11 states (32 dispensary licenses and ten cultivation facilities), released its second quarter ended June 30 on Thursday, showing revenues up 70 per cent year-over-year and a net loss of $1.9 million. Vireo’s top line, which was generated from operations in six states (Arizona, Maryland, Minnesota, New Mexico, New York and Pennsylvania) grew to $7.2 million while the Q2 adjusted EBITDA came in at $2.3 million. (All figures in US dollars unless where noted otherwise.)

The company’s M&A over the quarter saw it acquire two medical cannabis licenses in Nevada along with medical licenses in the Commonwealth of Puerto Rico. Its current assets by quarter’s end were $77.0 million, including cash on hand of $30.3 million. Total current liabilities were $10.4 million, with $1.0 million of debt due within 12 months.

Founder & CEO Kyle Kingsley spoke in the quarterly press release of the company’s runway, saying,

“We expect revenue growth to improve during the second half of the year as we continue opening new dispensaries and complete various cultivation and manufacturing development projects, but some uncertainty regarding the timing of regulatory approvals in many of our state-based markets has caused us to revise our year-end target of total operational dispensaries to a range of 16 to 20 dispensaries,” Kingsley wrote.

Karp says that Vireo’s quarterly revenue came in-line with his expectation, with growth driven by increased patient counts in Minnesota and New York, wholesale revenue in Maryland and Pennsylvania and contributions from recently closed acquisitions in Arizona and New Mexico. The analyst says that VREO’s EBITDA will continue to improve as individual states stabilize their markets.

Karp likes the positioning of Vireo Health in its home state.

“Minnesota has begun plans to adopt an adult use market in 2020. As Vireo is only one of two operators in the state we believe they are positioned well to take advantage of their first mover status. We estimate the adult market to be worth approximately $275 million in 2020. We also expect Pennsylvania retail to open in early Q4/19. Merit based applications have been submitted for New Jersey and Missouri,” Karp writes.

“We anticipate strong performance from the Company moving forward as it begins to generate revenue in the seven additional states in which it has recently entered,” he says.

Moreover, Karp says that Vireo is distinguishing itself on IP, both in the medical cannabis arena and in the genetics of industrial hemp production. “We believe that while the MSO model will drive Vireo’s initial growth, its IP sets it apart and will sustain growth over the long run,” writes Karp.

The analyst has VREO currently trades at a discount to its US MSO peers, estimating that the stock is priced “very attractively” at 2.4x his 2021 EBITDA estimate as compared to its MSO peers (those with assets in ten or more states) trading at 8.5x. Karp is calling for fiscal 2019 revenue and adjusted EBITDA of $61.8 million and $10.5 million, respectively, and fiscal 2020 revenue and adjusted EBITDA of $144.2 million and $34.6 million, respectively.