Buy Cresco Labs for a triple, says Beacon Securities

Investors should look to buy Cresco Labs (Cresco Labs Stock Quote, Chart, News CSE:CL) for big upside, says one analyst.

Cresco Labs has recently made a couple of moves which show that the company’s expansion plans throughout the United States are proceeding as scheduled.

That’s according to Beacon Securities analyst Russell Stanley who on Tuesday delivered a corporate update on the multi-state cannabis operator, saying the stock is still trading at a discount to its cannabis sector peers.

Chicago-based Cresco Labs, which has interests in 12 states, including 29 dispensaries and licenses for up to 62 altogether, announced on Tuesday the closing of a previously announced bought deal financing round, issuing 7,350,000 units at a price of C$10.00 per unit for total proceeds of C$73.5 million. Each unit included a share plus a 1/2 warrant with an expiry in three years and convertible at C$12.50 per share.

Full exercise of the overallotment would take the gross proceeds to C$84.5 million. Cresco management says the funds will be used for business development, for working capital requirements and other general corporate purposes.

Along with the financing, Cresco announced on September 16 plans to acquire Tryke Companies for $282.5 million, including $55 million in cash and $227.5 million in stock. Tryke, which generated $70.4 million in revenue and $24.6 million in EBITDA over fiscal 2018, owns Reef Dispensaries and has four Las Vegas dispensaries, two medical stores in Phoenix and cultivation and processing capabilities in Nevada and Arizona as well as a cultivation license in Utah. (All figures in US dollars unless where noted
otherwise.)

Stanley says the Tryke deal fits with the company’s stated plans.

“During the Q2 conference call in August, management had noted that Cresco already had exposure to the states that it wanted, and that its future M&A activity would be focused primarily on strengthening its operations in existing states, rather than adding new ones. The Tryke transaction is consistent with that game plan,” writes Stanley.

“Excluding the $30 million in real estate to be acquired, we estimate that CL is paying approximately 3.6x sales and 10.3x EBITDA, based on the F2018 results. Given management’s comments and similar transactions announced by peers, we expect that this acquisition would close late in H1/20,” Stanley says.

The analyst has adjusted his estimates for Cresco accordingly, now calling for fiscal 2019 revenue and EBITDA of $155 million and $16 million, respectively, and for fiscal 2020 revenue and EBITDA of $747 million and $187 million, respectively.

Stanley thinks Cresco is a cheap stock relatively speaking, estimating that it trades at about 4.9x his fiscal 2021 EBITDA estimate, which represents a 17-per-cent discount to the 5.8x average among US-operating cannabis companies and a 25-per-cent discount to the 6.5 average of the broader peer group.

Looking ahead, Stanley says that there are potential catalysts for the stock in progress on the Origin House transaction, the closing of Cresco’s acquisitions in Florida, Massachusetts and New York, the company’s third quarter financials due in November and additional M&A and buildout news.

The analyst is reaffirming his “Buy” recommendation and $24.00 target price, which represented a projected return of 200 per cent at the time of publication.