Vireo Health has still more upside, says M Partners

M Partners analyst Paul Piotrowski likes the pace of expansion efforts on the part of US cannabis name Vireo Health International (Vireo Health International Stock Quote, Chart, News CSE:VREO), which just completed a rebranding of its Minnesota operations.

In a research update to clients on Friday, Piotrowski maintained his “Buy” rating but raised his target price from C$1.25 to C$1.75 per share, which at press time represented a projected one-year return of 27 per cent.

Vireo Health calls itself a physician-led cannabis company and currently has a network of retail dispensaries under the Green Goods banner. The company has assets in ten states and Puerto Rico and is operational in seven markets including core markets in Arizona, Maryland, Minnesota, New Mexico and New York.

Vireo announced on September 15 that its Minnesota Medical Solutions (MinnMed) subsidiary has changed its name to Vireo Health of Minnesota, with its state-wide retail now called Green Goods. Vireo currently has cannabis patient centres in Minneapolis, Bloomington, Rochester and Moorhead and says it will open two new locations in Blaine and Hermantown by November of this year.

“The Green Goods brand is the next evolution of Vireo's continued commitment to providing patients with best-in-class medical cannabis products and customer experiences,” said Kyle Kingsley, MD, CEO and Founder of Vireo, in a press release.

“The new renovated locations will both allow us to better serve patients and transform how we interact with local communities and employees.”

In his report, Piotrowski said Vireo’s Minnesota expansion is part of a $8 to $9-million capex program, where in Arizona the company is adding nine acres of outdoor grow; in Maryland, Vireo recently closed on an acquisition of a 110,000 sq ft greenhouse facility with plans to build out its dispensary license with first sales expected in Q1/21; and in New Mexico, Vireo plans to open two additional retail locations by the end of this year.

After a big drop over the first few months of this year, Vireo’s share price has been on the rise of late, climbing almost 70 per cent since late August. But Piotrowski still thinks the VREO is undervalued.

“While investor confidence has certainly returned, VREO continues to trail multi-state operators with New York assets, which trade at ~14x. We believe the discount is unwarranted given the alleviation of capital concerns, the resumption of a growth program and the increased likelihood of federal and state level regulatory changes. We have lowered the discount rate applied in our DCF analysis to reflect the reduced risk profile of the Company and the strong performance of its broad peer group,” Piotrowski
wrote.

“Overall, we are reassured by the Company’s efforts to curtail operating costs, while continuing to grow in its core markets. We continue to anticipate improvements to VREO’s gross margins with greater retail sell through and as the Company works through higher inventory levels in New York,” he said.

“Further, we believe Vireo is well-positioned to benefit from potential regulatory changes across the U.S. Vireo’s core market of Arizona is likely to have a successful ballot initiative this year, and mounting pressure from New Jersey, and potentially Pennsylvania, increase the likelihood of legislative reform in New York. Adult-use legalization in New York adds significant upside beyond our target price,” the analyst added.