Cresco Labs is very undervalued, Beacon says

Undervalued? Beacon Securities analyst Russell Stanley is staying bullish on US cannabis MSO Cresco Labs (Cresco Labs Stock Quote, Chart, News: CSE:CL), which just received early approval to sell recreational marijuana in the state of Illinois.

In a client update on Wednesday, Stanley reaffirmed his “Buy” rating and C$24.00 target for Cresco, which at press time represented a projected return of 189 per cent.

Chicago-based Cresco, which has interests in 12 states including 29 dispensaries and licenses for up to 62, announced on Wednesday that it has received Early Approval Adult-Use Dispensing Organization Licenses for all five of its existing Illinois medical cannabis stores. The rec use licenses makes Cresco currently the only company in the state to have both adult-use cultivation and adult-use dispensary licenses.

Cresco CEO Charlie Bachtell said that with Illinois’ rec market set to open in January, 2020, the state is expected to produce between $2 and $4 billion in sales at maturity, effectively making it one of the largest cannabis markets in the US.

“Cresco is well-positioned to capture a significant share of this revenue opportunity for shareholders. We have 25 per cent wholesale share of the current medical market, a portfolio of recognized brands and three cultivation facilities that can represent 630,000 square feet at completion, in what is expected to be a supply-constrained market,” said Bachtell in a press release.

Stanley says he is taking the announcement as a positive for the stock and company, as it shows Cresco’s progress in building on its leadership position in its home state of Illinois.

Earlier this year in April, Cresco announced an agreement to acquire cannabis brands company Origin House for $1.1 billion, and Stanley says that the deal should close soon.

“The current 30-day waiting period under HSR antitrust regulations is due to expire tomorrow (October 17th). Assuming that the US Department of Justice raises no issues, clearance of this waiting period should allow Cresco to close the all-stock acquisition of OH shortly,” writes Stanley.

“The outside date on the acquisition agreement was recently extended to November 15th. While the discount at which OH trades (relative to the implied value of the purchase price) recently expanded to 14 per cent, as of last night’s close, it had narrowed to 9 per cent,” he says.

On the issue of Pennsylvania’s path to adult-use legalization — a key state for Cresco — Stanley says that despite the fact that Governor Tom Wolf has recently announced his support for rec pot and despite the introduction into the state Senate on Tuesday of a bill on adult use, the analyst sees meaningful progress on legalization as remaining challenging, notably due to members of the Republican Party controlling both the House and Senate in the state.

Looking ahead, Stanley thinks that Cresco Labs will generate fiscal 2019 revenue and EBITDA net NCI of $155 million and $16 million, respectively, and fiscal 2020 revenue and EBITDA net NCI of $747 million and $186 million, respectively.

Cresco’s share price performed well over the first stretch of 2019 but has fallen like the rest of the sector over the past six months. Year-to-date, Cresco is currently down six per cent.