Cresco Labs price target cut at Echelon Wealth Partners

Following the long-anticipated closing of the acquisition of Origin House, Echelon Wealth Partners analyst Matthew Pallotta has lowered his price target on Cresco Labs (Cresco Labs Stock Quote, Chart, News CSE:CL)

On Wednesday, Cresco announced the closing of its previously announced acquisition of CannaRoyalty Corp. (Origin House).

“This is a transformational deal for Cresco and represents the culmination of the better part of a year’s work for both the Cresco and Origin House teams,” Cresco CEO Charlie Bachtell said. “With the closing of this transaction, Cresco is in a position to accelerate its entry into one of the largest legal cannabis markets in the world, while adding valuable expertise in wholesale distribution and brand development, which we expect will drive significant value for all of our shareholders as we scale across the country in the coming years. We also see meaningful synergies across our national footprint through the addition of Origin House’s ultrapremium indoor cultivation team, which we expect will assist us in our goal to consistently outperform the market on yield and quality metrics. In an industry that is in flux, Cresco is one of the most fundamentally sound and best-positioned multistate cannabis operators in the U.S. The company has built an engine that is designed to execute operationally, develop leading brands, and get them into the hands of consumers to drive growth and value across all three horizons — short, medium and long term.”

Pallotta says the transaction closed on schedule, but the consideration was slightly more than he expected.

“We had previously modelled the Origin House acquisition closing in mid-January, and so the close is in line with our forecasted timeline,” he noted. “However, we had previously modeled Cresco issuing 70.6M shares in consideration for the transaction, which was 5.3M less than the Company actually issued, due to increased share-based compensation and shares issued for services. We have updated our capital structure for this additional dilution relative to our estimates.”

The analyst said his model on the stock has changed to accommodate the share count following the Origin House acquisition, he has moderated his estimate on California sales for 2020, pushed out the timing of the Hope Health acquisition, and updated for recent financing developments, including $50M sale-leaseback of Lincoln, IL facility.

The analyst now expects Cresco will post Adjusted EBITDA of $4.6-million on revenue of $129.3-million in fiscal 2019. He expects those numbers will improve to EBITDA of $198.3-million on a topline of $744.1-million the following year.

As a result of these model changes, Pallotta has lowered his target price on Cresco Labs from $12.00 to $11.50, which implied a return of 48 per cent at the time of publication.