4Front Ventures gets bullish new target price at Beacon Securities

Beacon Securities analyst Doug Cooper likes the new look of cannabis company 4Front Ventures  (4Front Ventures Stock Quote, Chart, News CSE:FFNT), saying the outlook for 4Front has improved dramatically since its major restructuring.

In an update to clients on Wednesday, Cooper reiterated his “Buy” rating but raised his target price from C$1.50 to C$2.00, which at the time of publication represented a projected 12-month return of 251 per cent.

Formed from a merger last year between Washington State-based Cannex Capital and 4Front Holdings, which has interests in Massachusetts, Illinois, California, Maryland and Pennsylvania, 4Front had a leadership change at the end of March this year with former 4Front Holdings CEO Josh Rosen stepping down and giving the reins to former Cannex head Leo Gontmakher. (The company also had a change at the CFO position with Nicolle Dorsey, former executive vice president of finance taking over from Brad Kotansky.

The move was greeted positively by Cooper who praised Gontmakher’s work with Cannex and its operating company Northwest Cannabis out of Washington’s tough pot market.

In his update, Cooper said experienced management is one of the four keys to success in the cannabis space (the others being geographic focus, having a strong balance sheet and being a low-cost operator) and 4Front has them all, he said.

On keeping operating costs low, Cooper pointed to the yield improvement between Q4 2019 and Q1 2020 in 4Front’s Massachusetts business where production went from 180 grams per square foot to 310 grams.

On geographic focus, Cooper noted how 4Front’s earlier plans involved a much larger group of states, where the company has now trimmed its assets to its five focus states and in the process netted the company about $30 million in divestitures, leaving 4Front with “a smaller, yet incredibly strong portfolio of assets in excellent jurisdictions, all of which are recreationally legal,” Cooper wrote (All figures in US dollars).

On the remaining issue, the balance sheet, the analyst figured 4Front has about $30 million of net new capital, which is enough to cover op ex until the company becomes cash flow positive. As well, the company has cut its net debt position in half since September 2019, down to $35 million.

“With the recent operational and financial changes at the company, we believe the risk profile has been reduced while the profit outlook has been increased,” Cooper said.

“The focus on operations in a footprint that does not stretch the balance sheet should be seen as a good thing. At a recent price of C$0.60, the stock has an EV of $260 million and trades at 1.4x and 5x our FY21 sales and EBITDA forecast respectively. With a focus on excellent growth states (IL, MA and CA) and the operational expertise Mr. Gontmakher’s team brings, we believe 4Front can become significant players in each of those markets as it is in WA,” Cooper said.

Looking ahead, Cooper thinks 4Front will generate fiscal 2020 system sales of $101.5 million and adjusted EBITDA of $9.8 million and fiscal 2021 system sales of $180.5 million and adjusted EBITDA of $50.1 million.