Beaten down Curaleaf Holdings has huge upside, GMP says

GMP Securities analyst Robert Fagan says he’s impressed with the quick progress made by US cannabis play Curaleaf Holdings (Curaleaf Holdings Stock Quote, Chart, News CSE:CURA) in its pending acquisition of Select.

In an update to clients on Wednesday, Fagan reiterated his “Buy” rating and C$24.00 target price, which represents a projected 12-month return of 243.8 per cent at the time of publication.

Massachusetts-based Curaleaf, which has interests in 19 states and pro forma 71 operating dispensaries with licenses for 60 more, announced on Wednesday that the 30-day waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) has expired, which paves the way for CURA’s acquisition of state regulated cannabis company Cura Partners, Inc, owners of the Select brand of cannabis products.

Announced in May of this year, the deal would see Curaleaf acquiring Select’s manufacturing, processing, distribution, marketing and retailing operations and all adult-use and medical cannabis products marketed under the Select brand name, including all intellectual property.

In the same announcement, Curaleaf detailed amendments to the deal, an all-stock purchase which originally called for CURA to issue 95.6 million shares to Select on closing but would now see CURA issue 55 million shares on closing (with a current value of about $300 million) and then another 40.6 million shares to be issued if and when Select reaches certain 2020 revenue targets (beginning at $130 million and reaching a maximum of $250 million in sales). The amended deal also includes a potential share-based earnout in the event that Select’s 2020 sales exceed $300 million, with a value of up to $200 million proportional to the extent to which revenues exceed the $300 million target.

GMP’s target on Curaleaf Holdings implies a return of 243.8 per cent

Fagan calls the progress and amendments to the deal positives for the company and stock.

“We are generally encouraged by the rapid progress of the Select acquisition, representing a substantially quicker timeline than our current expectations for the Select acquisition to close during Q2/20,” the analyst said. “With approvals from two of the four states Select is currently active in, we believe CURA has high visibility towards the acquisition closing timeline. In our view, this suggests good chances of CURA meeting its Jan. 1st targeted closing date, providing a potential positive read-through for our 2020 estimates.”

“We are equally impressed with CURA’s ability to successfully amend the transaction terms on a fair basis for all parties, underpinning the company’s M&A expertise and providing CURA with downside protection while simultaneously incentivizing Select to maximize its performance,” Fagan adds.

The analyst notes that given CURA’s share price decline since May of this year, the acquisition multiple is currently 2x 2020 EV/Sales when at the high end of Select’s revenue target of $250 million. This is “significantly cheaper” than when the deal was first announced, says the analyst.

Curaleaf’s share price hit a high of $15.75 on May 1 but it’s been downhill since then, not just for CURA but for the entire cannabis sector. CURA is now down 130 per cent from that May high but still up 5.5 per cent for the year.