4Front Ventures has price target slashed at Beacon

US-operating cannabis company 4Front Ventures (4Front Ventures Stock Quote, Chart, News CSE:FFNT) is about to replicate its successful cultivation and manufacturing model across a number of US states, according to Beacon Securities analyst Doug Cooper.

The analyst delivered an update to clients on Wednesday wherein he maintained his “Buy” rating but cut his target price from C$5.50 to C$1.50, which at press time represented a projected 12-month return of 178 per cent.

4Front Ventures came out of a merger earlier this year between Cannex Capital, which was based in Washington State, and 4Front Holdings, which had a footprint in Massachusetts, Illinois, California, Maryland, Pennsylvania and Arizona.

The new entity now has 11 dispensaries across seven states, with three divisions: production wing
Brightleaf, retail wing Mission and Pure Ratios, which encompasses the wellness product division.

On November 29, 4Front released its third quarter 2019 financials, which represented the
first full quarter of the combined entity. 4Front reported “system sales” of $16.9 million
with an EBITDA loss of $7.4 million. (All figures in US dollars unless where noted
otherwise.)

Over the quarter, 4Front completed its first post-merger harvest in Brightleaf’s Worcester, Massachusetts, facility, while also introducing Cannex’ brands to the Mass. market.

Ongoing infrastructure buildout includes a manufacturing facility in Commerce, California, a facility in Georgetown, Mass., and adult-use preparations for Mission across a number of states.

4Front CEO Josh Rosen chose to use a board game analogy to explain his company’s approach.

“We have been, and intend to continue to be, aggressive, but prudent,” said Rosen in the quarterly press release. “As our President, Kris Krane, and I have noted in the past, our perspective is that we view the industry more like the game of Risk rather than Monopoly. In this capital markets environment, this means an even greater emphasis on strategic capital allocation, tighter spending controls, and prioritization of projects. We're built for this.”

Cooper says he was impressed by sales over the quarter from Brightleaf in Washington, where the company has about nine per cent of the market share and boasts an EBITDA margin over 20 per cent.

“We believe such financial results in an incredibly competitive market with wholesale prices of ~$700/lbs speak to the efficiency of its cultivation and manufacturing process in that state,” wrote Cooper.

“Recall that our investment thesis is driven by replicating the efficiency of Brightleaf’s model to other financially conducive states where 4Front has an established footprint, particularly its wholesale business in MA, CA and IL. In particular, our model is driven by two major buckets, namely the aforementioned wholesale business and its established retail network operating under the Mission banner,” he said.

Cooper notes that management’s updated guidance is more conservative than presumed by prior targets but calls it more realistic given capital constraints in the current cannabis environment and the company’s longer-than-expected rollout in Massachusetts.

The analyst thinks 4Front will generate fiscal 2020 system sales of $153.5 million and adjusted EBITDA of $9.6 million and fiscal 2021 system sales of $260.5 million and EBITDA of $46.1 million.