Vireo Health International gets new “Buy” rating at M Partners

Vireo Health International (Vireo Health International Stock Quote, Chart, News CSE:VREO) is on pace to reach positive free cash flow by the second half of 2021, according to M Partners analyst Paul Piotrowski, who launched coverage of the stock Monday with a “Buy” rating and C$1.25 target price.

Minneapolis-based Vireo Health is a multi-state operator with assets in ten states and Puerto Rico and currently generating revenue in seven of its markets, through retail, wholesale and home delivery. The company has core markets in Minnesota, New York, Arizona, New Mexico and Maryland and currently has 32 retail dispensary licenses and 13 operational locations, with wholesale revenue coming from Arizona, Maryland, New York, Ohio and Pennsylvania.

Vireo also recently created wholly-owned subsidiary Resurgent Biosciences to commercialize its IP portfolio through potential partnerships and has several patent applications pending approval and the company has entered into exclusive license and supply agreements with Ligand Pharmaceuticals for its patented Captisol pharmaceutical formulation technology for cannabinoid-based medications.

Piotrowski said one of the attractive features about Vireo is that several of the company’s limited license medical markets are close to either putting through adult-use legalization or expanding their medical programs, with Minnesota, New York, Arizona, New Mexico and Maryland all having the potential to go legal over the near to medium term, according to the analyst.

“We expect the NY medical market to grow to $624 million by 2024, and if the state passes adult-use legalization, we believe sales could reach $1.7 billion. Currently Vireo is one of only ten licensed operators in the state and positioned to rapidly expand its footprint. NY legalization adds an additional ~40 per cent to our target price,” Piotrowski wrote. (All figures in US dollars except where noted otherwise.)

Vireo management has made it clear that meeting its funding requirements and reaching positive free cash flow by the first half of 2021 are prime directives and that the sale of non-core and, if necessary, even core assets will take place to further its goals of scaling up in a few key markets rather than extending its geographic reach at this time.

On that front, last month Vireo announced the sale of wholly-owned cultivation and processing asset Pennsylvania Medical Solutions to Jushi Holdings for aggregate consideration of $16.3 million in cash, a $3.8-million seller note and the assumption of a $17-million long-term lease obligation.

“This transaction secures Vireo’s capital position for the foreseeable future and will enable us to comfortably execute our fiscal year 2020 operating strategy and begin generating positive cash flow in the first half of next year without requiring any additional capital infusions,” said Vireo founder and CEO Kyle Kingsley, M.D., in a press release.

On valuation, Piotrowski said his C$1.25 target, which at press time represented a projected return of 74 per cent, is reasonable considering the valuations for Vireo’s peers (other MSOs with New York state assets).

“Vireo’s valuation is further underpinned by the aggregate value of its license portfolio ($102 million) plus non-core assets in MA (acquired for $17.1 million in March 2019), NV (~$4 million pending regulatory approval), PR (acquired for $1.9 million in June 2019) and RI (acquired for $1.0 million in January 2019). We believe Vireo shares will re-rate closer to peers as the Company continues to improve margins and as selling pressure from its March 10, 2020 equity offering (done at $0.77/share) subsides,” Piotrowski wrote.

Looking ahead, the analyst thinks Vireo will generate fiscal 2020 (year end December 31) of $52.7 million and adjusted EBITDA of negative $3.0 million and fiscal 2021 revenue of $73.9 million and adjusted EBITDA of $8.9 million.