Green Growth Brands is a buy, says Paradigm Capital

Ahead of second quarter results from US cannabis MSO Green Growth Brands (Green Growth Brands Stock Quote, Chart, News CSE:GGB), Paradigm Capital analyst Corey Hammill says that the market overreacted to a January report suggesting the company may face a cash flow shortfall.

In a comment to clients on Monday, Hammill said he expects Green Growth’s revenue to climb 25 per cent over its Q1 numbers.

Columbus, Ohio’s Green Growth Brands has dispensaries in Nevada, Massachusetts and Florida along with a large network of CBD shops in malls across the United States. The company last reported financials in late November where it hit revenue of $12.7 million, up 77 per cent from the previous quarter. CBD sales were up 201 per cent sequentially to $5.1 million along, as GGB opened 81 mall-based CBD shops over the Q1, bringing its total at the time to 139 stores across 34 states.

The company also saw strong revenue generation from its two Nevada-based The+Source stores, where annualized revenue hit nearly $15,000 per selling square foot. (All figures in US dollars unless where noted otherwise.)

“We are proud of the topline growth we accomplished in Q1 and are extremely pleased with our current results, which are an indication of future growth,” said CEO Peter Horvath in a November 25 press release. “In fact, the four weeks of fiscal November, retail CBD sales were two-thirds of our total CBD sales reported in all of the thirteen weeks of first quarter fiscal 2020, which we are reporting today. This topline growth is reflective of our shift from investing in the foundation of our CBD business to focusing on its execution.”

But Green Growth’s share price didn’t reflect that growth trajectory, unfortunately, as the stock kept tumbling through November and December. The next month and a half were no better, as the market responded to, among others, a January Monthly Progress report from the Canadian Securities Exchange, one which suggested that balance sheet liquidity could be a problem, contributing to a 30-per-cent drop in the stock over one week earlier this month.

For his part, Hammill isn’t buying it.

“We believe that the market overreacted to the headline without having a thorough understanding of how the ~$100-million Schottenstein family backstop credit facility works or the nature of the company’s upcoming obligations,” wrote Hammill in a comment to clients on Monday.

Hammill said GGB has a promissory note due on March 15 and a debenture payment due in May and, currently, appears to have insufficient liquidity to make both payments. Yet the analyst argues GGB has an option to push back both payments, although Hammill says he is waiting for the earnings call to hear more on this from management.

For the Q2, Hammill is expecting $9.5 million in revenue from GGB’s MSO vertical, up from $7.6 million, and $10.8 million from the company’s CBD CPG vertical, more than double that of the previous quarter, for a total of $20.3 million. For EBITDA, Hammill is calling for negative $14.8 million.

As of his last ratings update, Hammill was unchanged with a “Buy” on Green Growth and target price range of C$3.50–C$5.75.

“The company has built out a retail infrastructure with nearly 200 physical locations and a growing online business. GGB shares are down 32 per cent in the past month compared to the American Cannabis Operator Index which is down 18 per cent. Green Growth Brands trades at 2.9x our 2020e sales estimate of ~US$83M, compared to our tracking basket of MSO peers at ~3.5x consensus 2020e sales,” wrote Hammill.