HARV is a pot stock with big upside, AltaCorp Capital says

In an update to clients on Friday, AltaCorp Capital analyst Kenric Tyghe is staying with his “Outperform” rating and one-year target of C$4.00 on US cannabis company Harvest Health and Recreation (Harvest Health and Recreation Stock Quote, Chart, News CSE:HARV).

Headquartered in Tempe, Arizona, Harvest Health is a US multi-state operator with business in nine states including 35 dispensaries and 24 cultivation and production facilities. In its home state of Arizona, HARV is a market leader with 14 stores.

The company on Friday announced an amendment to the terms of its planned asset divestitures in the state of California, originally announced on April 28, 2020, to Hightimes Holding. The initial plan was to sell 13 unspecified and planned dispensaries in the state for total consideration of $80.0 million, including up to $5.0 million in cash, a one-year promissory note of $7.5 million bearing interest at ten per cent and $67.5 million in Series A Preferred Stock issued by Hightimes.

Management now is saying it intends to sell a portfolio of equity and assets with respect to ten operational and planned dispensaries for $67.5 million, including $1.5 million in cash, a one-year promissory note of $4.5 million at ten per cent and $61.5 million in Series A Preferred Stock from Hightimes.

The end result is Harvest will keep ten stores and licenses and divest ten rather than the earlier retaining of seven and divesting of 13.

“Harvest will retain four operating dispensaries located in Grover Beach, Napa, Palm Springs, and Venice and select licenses for potential retail locations in California following completion of this planned divestment.  As such, the previously announced full year 2020 revenue target remains unchanged,” said Harvest Health in a press release.

Along with much of the cannabis space, Harvest Health has seen its share price dwindle over the past 12 months, although the stock has lifted somewhat from its low of mid-March. At C$1.40 per share, HARV is now down 66 per cent year-to-date. (All figures in US dollars except where noted otherwise.)

Harvest Health last reported earnings in late May where its first quarter 2020 results featured revenues of $45.0 million and an adjusted EBITDA loss of $3.9 million. On average, analysts were expecting $43.0 million and $6.2 million, respectively. Management’s full 2020 revenue guidance of about $200 million arrived below the consensus forecast of $233.6 million.

In his review of the quarter dated May 20, Tyghe judged HARV’s portfolio of assets as “very well positioned” in key high-growth states. (Along with its Arizona business, HARV has a strong presence in Florida, Pennsylvania and Maryland, according to Tyghe.)

Tyghe said at the time that potential headwinds exist on consumer spending coming out of COVID-19, notably a lack of consumer confidence and a dramatic rise in unemployment, both of which could impact Harvest going forward.

Tyghe is calling for HARV to generate fiscal 2020 revenue and adjusted EBITDA of $328 million and $64 million, respectively, while as of the June 12 publication date of his latest report, Tyghe’s C$4.00 target represented a projected return of 186 per cent.