MedMen downgraded by Industrial Alliance

Based on new amendments to the company’s credit facility, Industrial Alliance Securities analyst Nav Malik is downgrading his rating on US cannabis play MedMen Enterprises (MedMen Enterprises Stock Quote, Chart, News CSE:MMEN), saying that the prospect for delays in financing would slow the company’s growth.

In an update to clients on Wednesday, Malik changed his rating from “Buy” to “Hold” while dropping his target price from C$4.00 to C$1.65.

California-based MedMen, a vertically-integrated multi-state operator with 32 retail stores in operation and licenses for a total of 70 (including pending acquisitions), released its fourth quarter and fiscal year ended June 29, 2019, financials on Monday, showing Q4 revenue of $42 million, up 104 per cent year-over-year. (All figures in US dollars unless where noted otherwise.)

Co-founder and CEO Adam Bierman said that fiscal 2019 was transformative for his company, which increased its annual revenue by 227 per cent.

“Our success was due, largely in part, to our loyal customer base. Throughout the year, we served over one million customers from all 50 states and more than 100 countries. In California, the largest cannabis market in the world, MedMen surpassed a record $110 million in annualized run-rate retail revenue,” writes Bierman in a press release.

There were no big surprises in the Q4 results, according to Malik, who was forecasting
$42.0 million in revenue for the quarter. MedMen’s adjusted EBITDA loss of $39.4 million was also in line with Malik’s estimated loss of $38.8 million. The analyst noted that management was targeting breakeven EBITDA by the end of calendar 2020 and that while California remains its core market (at 66 per cent of revenue in Q4), MedMen is also focused on five other key states: Florida, Illinois, New York, Nevada and Massachusetts.

The novel news item, however, was released the following day on Tuesday, according to Malik, in the form of announced additional amendments to MedMen’s $250-million credit facility with Gotham Green Partners which effectively give the latter say in whether it will fund the final tranche of the loan. This new development puts MedMen’s expansion plans under question, says Malik.

“To date, MedMen has borrowed $125 million under this facility in two tranches. A third tranche for $10 million is expected to be funded within 30 days. The key amendment, in our view, is that the fourth tranche for $115 million now requires the consent of the lender (whereas previously it was at MedMen’s option), adding some uncertainty as to whether Gotham Green will fund the final tranche. As such, MedMen will likely evaluate other financing alternatives. Other amendments to the facility essentially provide MedMen with the flexibility to seek alternatives,” says Malik.

The analyst has reduced his estimates accordingly and is now calling for fiscal 2020 revenue and EBITDA of $265.2 million and negative $90.5 million, respectively, and for fiscal 2021 revenue and EBITDA of $470.9 million and $23.7 million, respectively.

Malik’s C$1.65 target now represented a projected 12-month return on investment of 16.2 per cent at the time of publication.