Harvest Health M&A troubles mean target cut at Stifel

M&A troubles for Harvest Health and Recreation (Harvest Health and Recreation Stock Quote, Chart, News CSE:HARV) has earned the stock a price target cut at Stifel Canada, though the bank still thinks the stock is a “Buy”.

In a research update to clients Wednesday, Stifel analyst Robert Fagan cut his price target on Harvest Health from $10.00 to $7.50, implying a return of 100 per cent at the time of publication.

Fagan, noting that HARV filed court documents seeking termination of its Falcon International acquisition and is seeking repayment of a $50-million loan, says these are bumps in the road that make the immediate future less clear from the cannabis player.

“HARV has historically been one of the most active M&A players amongst its MSO peers, and with a pro-forma cash position estimated at ~$150m (incl. Falcon repayment), we believe the company is well positioned to continue this strategy,” the analyst said. “However, with two of HARV’s sizable M&A deals now subject to restructuring or potential termination, in our view this clouds somewhat our visibility on the evolution of the company’s platform. We reflect this in a reduction to our valuation previously attributable to future M&A by ~70%. Our C$7.50 target (C$10 prior) is based on 20x our 2020 EBITDA est. of $105m (pro-forma), plus ~$30m (~$105m prior) we assume is acquired.

Fagan thinks HARV will post EBITDA of negative $48.2-million on revenue of $120-million in fiscal 2019. He expects those numbers will improve to EBITDA of positive $69.8-million on a topline of $469.2-million the following year.

On a more positive note, the analyst says another pickup could make the company a retail leader in California.

“Have a Heart could make HARV the retail leader in CA. Currently, HARV is under negotiations to acquire Interurban Capital Group, Inc. (Have a Heart; HAH) for an all-stock purchase price of ~$155m. With 11 stores open mainly in WA and CA, we estimate HAH’s sales potential at ~$25–30m/year, but have not added this to our forecasts. While the Falcon termination could reduce HARV’s vertical integration in CA, we note HAH could significantly boost HARV’s retail footprint (3 open stores, 7 licences) to the largest in the state amongst public MSOs. In addition, HARV shifting its CA business model towards retail and away from distribution/cultivation should also improve its margins in the state.”