Harvest Health is wildly undervalued, AltaCorp Capital says

AltaCorp Capital analyst Kenric Tyghe is holding off on making adjustments to his figures on Harvest Health and Recreation (Harvest Health and Recreation Stock Quote, Chart, News CSE:HARV) after the US cannabis name’s newly announced plan to rid itself of some California assets.

In an update to clients on Tuesday, Tyghe said Harvest is still likely to be left with significant holdings in the highly coveted state.

Tempe, Arizona-based Harvest Health is a vertically-integrated US MSO with assets in a number of states including core holdings in Arizona, Florida, Maryland and Pennsylvania.

HARV’s share price shot up significantly in recent days, with the market now reacting to news of the planned divestment of assets, announced on Tuesday, which would see 13 unspecified operational and planned dispensaries in California go to private company HighTimes Holding.

Terms of the deal involve a cash consideration of up $5 million, a $7.5 million one-year promissory note with ten per cent interest and $67.5 million in Series A Preferred Stock, expected to be convertible into common shares at some point in the future.

The transaction has an expected closing date of June 30, 2020. (All figures in US dollars except where noted otherwise.)

“This planned divestment of select retail assets in California allows Harvest to focus on optimizing operations and expanding assets in core markets such as Arizona, Florida, Maryland and Pennsylvania while retaining a smaller retail presence in California,” said CEO Steve White in a press release. “We will continue to examine the strategic value of our assets and streamline operations as we move toward achieving our profitability goals.”

The moves have been coming fast and furious for HARV, which last month bought management services company Interurban Capital Group and its Have a Heart assets, along with nixing its bid to acquire Verano Holdings and announcing its intention to buy Franklin Labs from CannaPharmacy.

Harvest Health also purchased in March, according to Tyghe, the Have a Heart deal, which involves three open stores in California and licenses for an additional seven in the state, gives HARV “a larger than
widely appreciated footprint in what is an attractive (but non-core Harvest) market.” Tyghe said after all is said and done HARV now has a combined footprint of 20 potential stores in the state.

On his estimates for Harvest Health going forward, Tyghe wrote, “We expect Harvest to report Q1/20e results in late May 2020 and believe it is prudent to wait on additional information prior to making estimate revisions on this highly contingent planned transaction.”

Tyghe is for the moment retaining his “Outperform” rating and one-year target of C$4.00, which at press time represented a projected return of 245 per cent.

HARV reported its fourth quarter 2019 results on April 7, showing Q4 revenue of $37.8 million, up 123 per cent year-over-year and up 14 per cent sequentially, and an adjusted EBITDA loss of $6.8 million compared to a loss of $10.9 million a year earlier. Its net loss for the quarter was $71.1 million.