The closing of its acquisition of Valley Agriceuticals is a positive for US multi-state operator Cresco Labs (Cresco Labs Stock Quote, Chart, News CSE:CL), says Beacon Securities analyst Russell Stanley.
On Tuesday the analyst provided an update on Cresco, saying the stock is still trading at a discount to its peers.
Chicago-based Cresco, which has interests in 12 states including 29 dispensaries and licenses for up to 62, on Tuesday announced that it had closed the purchase of Gloucester Street Capital, parent entity to Valley Agriceuticals.
The deal, which has a purchase price of $85.5 million including $43.5 million in cash, $32.7 million in stock and $9.4 million in warrants, will see Cresco enter the New York State market with four dispensaries. (All figures in US dollars unless where noted otherwise.)
The new assets will position the company well to immediately generate meaningful revenue from the New York market, says Cresco management.
“New York is one of the most influential consumer markets in the world and we expect the state to act as a cornerstone in Cresco Labs’ plan to continue building the most strategic and valuable geographic footprint in the U.S. cannabis industry,” said Charles Bachtell, CEO and Co-founder of Cresco Labs, in a press release.
Stanley says he has already figured the transaction into his forecasts for Cresco but is viewing the closing favourably, nonetheless.
“New York is a major population centre with significant growth potential, as discussed below. With MedMen Enterprises having announced termination of its plan to acquire PharmaCann (private) earlier today, we believe the perceived risk of M&A closings has climbed,” Stanley said.
“As of writing, Origin House is now trading at a 12 per cent discount to the implied value of the all-stock offer, up slightly from 10 per cent before the open. We continue to expect CL to close the OH transaction this quarter, with the current 30-day waiting period related to HSR antitrust regulations scheduled to end on-or-around October 17,” he continued.
The analyst notes that New York’s medical market, with 108,000 registered patients in a population base of 19.5 million, is currently underpenetrated, saying that if it were to achieve Arizona-like patient penetration levels of 2.8 per cent would support a patient base of about 555,000.
Updating the scene on rec legalization in New York, Stanley says that Governor Cuomo is reportedly seeking to coordinate legalization efforts with certain neighbouring states and is expected to present a plan for legal pot in New York as part of his State of the State address in January.
Stanley thinks that Cresco Labs will generate fiscal 2019 revenue of $155 million and EBITDA net NCI of $16 million and fiscal 2020 revenue of $747 million and EBITDA net NCI of $186 million.
The analyst argues that Cresco is still trading at a discount, at about 4.4x his fiscal 2021 EBITDA estimate versus the 5.6x multiple for US operating companies in the cannabis space, representing a 20 per cent discount. For the wider 9.1x multiple attributed to the broader cannabis peer group, Cresco is at a 51 per cent discount.
With his update, Stanley is maintaining his “Buy” rating and C$24.00 target price, which represented a projected return of 225 per cent at the time of publication.