Buy Cresco Labs for 182 per cent upside: Beacon Securities

A new term loan for US cannabis play Cresco Labs (Cresco Labs Stock Quote, Chart, News CSE:CL) was given the thumbs up by Beacon Securities analyst Russell Stanley on Thursday as the analyst reaffirmed his “Buy” rating and C$24.00 target for Cresco, saying that the company has a number of catalysts upcoming.

Chicago-based Cresco Labs is a vertically-integrated cannabis company with interests in 11 states totalling a population of 133 million. Currently, Cresco has 21 dispensaries with licenses for an additional ten, along with cultivation and manufacturing operations.

The company announced the new credit facility on Thursday, where the loan includes an initial amount of up to $100 million and an option to increase the loan up to $200 million. Cresco says that the money will go towards expansion operations in Illinois, costs associated with pending acquisitions and other growth initiatives. (All figures in US dollars unless where noted otherwise.)

“This agreement reflects the strength and growth potential of the national platform Cresco has built as well as our ongoing commitment to execute a superior capital agenda for the benefit of shareholders,” said Charlie Bachtell, CEO and co-founder of Cresco Labs, in a press release.

Stanley says that the announcement positions Cresco to move ahead with both its organic growth priorities and pending acquisitions, where management has identified Illinois, Pennsylvania and California as its priority markets.

“We are leaving our model unchanged at this point, but view the development positively as it strengthens the company’s balance sheet, allowing Cresco to fund its near/mid-term growth plans,” writes Stanley in an update to clients.

The state of Illinois just ushered in its legal recreational adult-use marijuana era at the start of January, with sales being reportedly brisk enough to induce product shortages. Cresco said customers began to line up outside its five Sunnyside locations across the state as early as 8 pm on New Years Eve, with stores opening at 6 am on January 1.

Stanley says Cresco has a unique position in Illinois with three licensed cultivation and manufacturing facilities versus two by Green Thumb Industries and only one by other producers.

The analyst noted that each facility is capped at 210,000 sq. ft., giving limited scope for peers to expand, along with limited available capital to fund it. Stanley says that widespread shortages are likely to continue for months.

“This debt facility sets Cresco up to expand capacity in order to build on its approximate 25 per cent share of market,” Stanley wrote. “The company also has two pending acquisitions that involve a cash component: Tryke Companies, which contemplates a $55 million cash payment upon closing, and Hope Heal Health in Massachusetts, which involves a $25 million cash requirement at close. Both transactions still require state approval, and the timing of that is always very difficult to predict, but this debt financing positions Cresco on the financial end.”

Stanley says that CL is currently trading at a 33 per cent discount to its US operating peers and at a 64 per cent discount to its broader cannabis peer group. Upcoming catalysts for Cresco include completion of the initial drawdown on this financing, the closing of the Hope Heal Health (Massachusetts) and Tryke (Nevada/Arizona) acquisitions, updates on the build-outs in Illinois and Pennsylvania and the company’s fourth quarter 2019 results.

At press time, Stanley’s C$24.00 target represented a projected return of 182 per cent.