Trulieve Cannabis selloff is a holiday gift, Beacon says

Beacon Securities analyst Russell Stanley’s investment thesis for Trulieve Cannabis (Trulieve Cannabis Stock Quote, Chart, News CSE:TRUL) remains intact as the US multi-state operator continues to dominate in the Florida market.

On Wednesday, Stanley issued an update to clients on Trulieve where he reiterated his “Buy” rating and C$36.00 per share price target, which at the time of publication represented a projected 12-month return of 160 per cent.

Stanley says the sector-wide selloff in cannabis makes Trulieve an early holiday gift to investors.

Vertically integrated cannabis company Trulieve currently has operations in California, Massachusetts and Connecticut, along with its position as the largest (and first) licensed medical marijuana company in Florida. Trulieve announced on Wednesday that company founders have agreed to extend the lock-up provisions on 11.2 million shares that were originally scheduled to be released on January 25 but will now be locked up until May 25, with 54.0 million other shares still scheduled for release on July 25.

CEO Kim Rivers said that extending the release demonstrates the founders’ confidence in the company and in management’s ability to execute to strategy.

“We believe this new schedule will reduce uncertainty in the coming quarter while we focus on our mission to be the leading customer-focused cannabis brand in the US and enhance shareholder value,” wrote Rivers in a press release.

Stanley said he’s taking the event as a positive and continues to support TRUL as a compelling investment opportunity as its dominance in Florida is clear.

“TRUL continues to dominate sales volumes in [the Florida] market, with a 51-per-cent share of smokable dried flower, and a 47-per-cent share of all other cannabis products,” wrote Stanley.

“Trulieve dispensaries sold (on average) 247 per cent more dried flower than the average dispensary and 163 per cent more of all other product categories in the state. As demonstrated in our CQ319 Earnings Report Card, TRUL produced the strongest revenue, EBITDA and EBITDA margins amongst US operating cannabis companies. The company has consistently beaten our revenue/EBITDA forecasts, with its Q3/19 results featuring a revenue beat of 17 per cent and an EBITDA beat of 52 per cent versus our forecast,” he wrote.

The analyst estimates that Trulieve trades at about 6.1x his 2021 EBITDA forecast, which represents a five-per-cent discount to the 6.4x average among US operators and a 49-per-cent discount to the 12x average for the broader cannabis peer group.

Looking ahead, Stanley sees catalysts in continued buildout progress, M&A that expands the company’s presence into other markets, progress on adult-use legalization in Florida and the company’s fourth quarter financial results. Stanley expects Trulieve’s full fiscal 2019 to come in with revenue of $252 million and adjusted EBITDA of $118 million and fiscal 2020 revenue of $405 million and adjusted EBITDA of $161 million.

Trulieve’s share price dropped sharply on Monday as the market reacted to allegations of fraud from short-seller Grizzly Research which contended, among other things, that Trulieve’s greenhouses produce low-quality output and that the company is involved in an FBI probe into corruption in the state of Florida, a well-documented event about which Trulieve’s board has commissioned an independent legal review.

In response, Trulieve’s Rivers issued a statement on Tuesday.

“I have full confidence in our management team and their abilities to continue to serve our customers without being distracted by these baseless allegations. Trulieve reserves all of its rights to take appropriate legal action against those responsible for the Report,” said Rivers.