US cannabis company Harvest Health & Recreation (Harvest Health & Recreation Stock Quote, Chart, News CSE:HARV) got a downgrade from analyst Nav Malik of Industrial Alliance Securities this week, who in an earnings review on Thursday said the overall risk profile of the cannabis industry has increased.
Tempe, Arizona-based Harvest Health and operations in key markets such as Arizona, California, Florida, Illinois, Maryland, and Pennsylvania. On a pro forma basis, Harvest has licenses in place for over 210 facilities including about 130 retail locations across 18 states and territories.
HARV reported its third quarter financials on Wednesday featuring total revenue for the quarter of $33.2 million, a 197-per-cent increase from a year earlier and up 25 per cent from the previous quarter. The company reported an adjusted EBITDA loss of $10.9 million compared to a loss of $12.4 million over the previous quarter. (All figures in US dollars unless otherwise noted.)
Over the Q3, Harvest opened six new cannabis stores and acquired four others. The company also won a cultivation license in Utah and made progress on a number of acquisitions, according to management.
“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.
The Q3 revenue of $33.2 million was higher than expected by Malik, who called for a top line of $31.0 million, while the $10.9-million adjusted EBITDA loss (before biological asset adjustments) was lower than Malik’s $4.8-million estimate. Pro forma revenue of $95 million was a touch above Malik’s expected $98 million.
The analyst points out the revised guidance from Harvest management, who are now calling for between $700 and $1,000 million in revenue for 2020 (was between $900 and $1,000 million) and for adjusted EBITDA margins to be between 20 and 30 per cent (was between 30 and 35 per cent). Malik says that a tighter and more uncertain environment for capital in the cannabis space is to blame for the lowered guidance.
The analyst said that on the basis of lowered estimates going forward and a lower EV/Sales target multiple of 2.5x (was 4.0x), he is lowering his target price from C$19.00 to C$7.00, which now represents a projected return of 93.6 per cent at the time of publication.
On the rating, Malik is shifting down to “Speculative Buy” from “Buy,” saying,
“We are revising our rating to Speculative Buy from Buy to reflect the risk profile of the cannabis industry. While tighter conditions for accessing capital may impact the pace of growth, we continue to believe Harvest remains a solid operator with licenses in place to build one of the largest footprints in the US cannabis industry,” Malik writes.
Harvest Health also announced on Wednesday that it is scaling back its pending acquisition of CannaPharmacy, saying that it will now only acquire a 46,800-sq ft cultivation and processing facility in Pennsylvania for $26 million rather than CannaPharmacy’s licenses and assets in four states for $88 million.