Harvest Health has price target slashed at Beacon Securities

An underwhelming quarter and revised guidance from management has analyst Russell Stanley of Beacon Securities lowering his price target on Harvest Health & Recreation (Harvest Health & Recreation Stock Quote, Chart, News CSE:HARV).

In an update to clients on Wednesday, Stanley dropped his target from C$26.00 to C$15.00 but kept his “Buy” recommendation, saying that worries about the company’s balance sheet are overblown.

Tempe, Arizona-based Harvest Health, which has interests across 18 states and territories with rights to operate more than 210 facilities including 130 retail locations, released its third quarter financials on Wednesday. Management said that over the Q3, Harvest opened six new retail locations while acquiring four others and won a cultivation license in Utah, along with progressing on a number of acquisitions.

“During the third quarter, Harvest continued to execute on its strategy by investing in assets and infrastructure needed to return to profitable growth. As a Company, we have the assets and team required to achieve operational excellence and succeed in the cannabis industry,” said CEO Steve White in the quarterly press release.

Total revenue for the quarter was $33.2 million, up 197 per cent from a year earlier and up 25 per cent over the previous quarter, while on a pro forma basis, Harvest generated over $95 million in revenue. Adjusted EBITDA was a loss of $11 million. (All figures in US dollars unless where noted otherwise.)

The analyst’s revised Harvest Health price target still represents a return of 313 per cent…

In his review of the quarter, Stanley says that the top and bottom lines came in lower than expected, where he was calling for $37 million in revenue and an EBITDA loss of $2 million (the consensus was calling for $33 million and negative $10 million, respectively).

Management reiterated its fiscal 2019 guidance for pro forma revenue of between $350 and $400 million with pro forma margins of ten per cent. But Stanley says that his estimates are markedly different, since he has a less optimistic timeline for the closing of Harvest Health’s pending acquisitions. Stanley is calling for Q4 revenue and EBITDA of $38 million and negative $9 million, respectively, whereas previously he had estimated $60 million and positive $9 million, respectively.

“We are reducing our 12-month target price to C$15.00 from C$26.00, driven solely by a right-sizing of our forecast following the guidance revisions announced by management earlier today,” says Stanley.

“We attribute the selling pressure on the stock to uncertainty with respect to HARV’s balance sheet and access to capital, and based on management’s comments during this morning’s conference call, we believe the company’s asset base can support the additional debt required to accelerate growth. We therefore reiterate our Buy rating,” he says.

The analyst contends that HARV is still trading at a marked discount, at approximately 8x his 2020 EBITDA estimate versus the 11x average of its US cannabis operator peers, representing a 24-per-cent discount.

Looking ahead, Stanley sees potential catalysts in additional build-out news, further updates on HARV’s acquisitions and progress on securing additional debt financing.

The analyst’s C$15.00 target represented a projected 12-month return of 313 per cent as of publication date.