Green Thumb Industries is a cheap pot stock, Beacon says

A new sale and leaseback deal for Green Thumb Industries (Green Thumb Industries Stock Quote, Chart, News CSE:GTII) gets the proverbial thumbs up from Beacon Securities analyst Russell Stanley.

In a note to clients on Wednesday, the analyst reaffirmed his “Buy” rating and C$24.00 price target for GTI, which represented a projected 12-month return of 115 per cent at the time of publication.

Chicago-based multi-state operator Green Thumb Industries has cannabis cultivation, production and retail operations across 12 states including 13 manufacturing facilities, 31 dispensaries and licenses for a total of 95 retail locations.

The company on Tuesday announced a sale-leaseback transaction with Innovative Industrial Properties (IIPR) for GTII’s licensed cannabis cultivation and processing facility in Danville, Pennsylvania for $20 million. IIPR has agreed to reimburse GTI for up to $19 million in facility improvements designed to increase capacity, which could take the transaction value to $40 million. (All figures in US dollars unless where noted otherwise.)

“IIP provides a flexible real estate capital solution that effectively addresses our expansion needs at the cultivation and processing facility in Danville,” said GTI Founder and CEO Ben Kovler in a press release. “This transaction allows us to efficiently raise capital. We plan to use the proceeds for strategic initiatives and capacity expansion projects in Pennsylvania, a high-growth medical cannabis market.”

Stanley is viewing the transaction positively as it creates balance sheet flexibility for GTI to expand its capacity in one of the most underrated markets in the United States, the analyst claims. Pennsylvania, the fifth-largest state by population, has a medical market which opened in early 2018 and already has 180,000 patients. On the adult-use front, Governor Wolf recently expressed support for legalizing rec marijuana, where two adult-use legalization bills have been filed over the past few months.

Stanley points out that although the Republican-dominated legislature has shown its opposition to legalization, voters are apparently in favour of the change, and further, that the state shares borders with New York and New Jersey, two states that may pass legalization laws over the next half-year. Together, this might put pressure on PA to legalize, the analyst says.

Green Thumb Industries (GTII) cheap compared to peers, analyst says…

Stanley thinks GTII is trading at a marked discount to its peer groups.

“At current levels, GTII trades at approximately 6x our 2021E EBITDA forecast, representing a 43 per cent discount to the 11x average at which the broad peer group trades and a 11 per cent premium to the 6x average at which other US-operating cannabis companies trade,” Stanley writes.

Ahead of the company’s third quarter financial results expected on November 20, Stanley is his revenue estimate higher than the consensus, calling for revenue of $62 million versus the Street’s $61 million. On earnings, the analyst is more conservative, expecting EBITDA of $6 million versus the consensus $8 million.

“Potential catalysts include the Q3/19 results, additional buildout progress, and additional M&A and/or license wins. During the remainder of F2019, we expect GTII to add two to four dispensaries in Pennsylvania, three to four dispensaries in Illinois (in anticipation of the opening of adult-use), and open its first of three dispensaries in New Jersey,” he writes.