In the cannabis space, Beacon Securities analyst Russell Stanley likes US cannabis company Columbia Care (Columbia Care Stock Quote, Chart, News NEO:CCHW), which recently released its quarterly numbers and announced a major acquisition.
Stanley reviewed the events in an update to clients on Wednesday and reaffirmed his “Buy” recommendation and 12-month target of C$14.00, saying Columbia Care currently trades at a significant discount to its cannabis industry peers.
Headquartered in New York City, multi-state operator Columbia Care has interests in 14 states and operations in 12, while also seeking a presence in Europe.
The company announced its third quarter ended September 30, 2019, results on Tuesday, reporting revenue of $22.1 million, a 123-per-cent increase year-over-year, and an adjusted EBITDA loss of $11.3 million. (All figures in US dollars unless where noted otherwise.)
Along with the quarterly results, Columbia announced entering into a definitive agreement to acquire The Green Solution (TGS), the largest vertically integrated cannabis company in the state of Colorado, for $140 million in stock and debt.
“Despite continued regulatory challenges, we have maintained our focus on driving towards profitability in existing markets, opening new markets, and innovating to ensure we have better and differentiated products and services,” wrote Columbia Care CEO Nicholas Vita in a Tuesday press release.
“In addition, Columbia Care continues to deliver on its key initiatives, and with today’s announcement of our first acquisition, The Green Solution, we enter a new phase of the Company’s growth cycle, using disciplined M&A as a complement to our core strategy,” he added.
Commenting on the quarter, Stanley said that the Q3 results were overall in line with his expectations.
Revenue of $22.1 million was a little lower than his estimate of $23.5 million and the consensus estimate of $24.7 million, while the EBITDA loss of $11.3 million was again slightly under Stanley’s negative $13.0-million forecast and the Street’s negative $12.3 million call.
The analyst noted that all of the company’s revenue growth was organic, representing a combination of new store openings and improved sales from existing locations. Gross margins fell to 24 per cent from the previous quarter’s 28 per cent as the company continues its build-out, Stanley writes. Columbia Care finished the quarter with cash and cash equivalents of $84.5 million, down from $125.3 million at the end of Q2 2019.
Stanley says that he likes the TGS deal.
“Not only does this transaction add a plug-and-play market leader, it also represents a major market opportunity for Columbia Care to expand penetration of its CNC credit card product into the second-largest cannabis market in the US. This also adds complementary brands to Columbia Care’s suite,” writes Stanley.
“CCHW has traditionally focused on higher-end products, while TGS has built its leadership around strong brands at multiple price points. TGS already has 125+ SKUs including edibles, beverages, concentrates and flower products. During last night’s call, management noted that it plans to cross-market these brands (CCHW products in CO, TGS products in Columbia Care’s other 14 states). TGS’ products should also help CCHW be well prepared in medical-only markets that are likely to legalize adult-use,” he says.
The analyst is expecting CCHW to generate fiscal 2019 revenue and attributable EBITDA of $82 million and negative $40 million, respectively, and fiscal 2020 revenue and attributable EBITDA of $357 million and $65 million, respectively.
Stanley’s C$14.00 target represented a projected one-year return of 230 per cent at the time of publication.
The analyst estimates that Columbia Care is now trading at approximately 4.5x his fiscal 2021 EBITDA forecast, which represented a 60 per cent discount to the company’s broad peer group and a 25-per-cent discount to its US-operating cannabis peers.