Trulieve Cannabis gets bullish new price target at Beacon Securities

Beacon Securities analyst Russell Stanley is feeling more bullish on Trulieve Cannabis (Trulieve Cannabis Stock Quote, Chart, News CSE:TRUL) after the company’s third quarter earnings beat. In a report to clients on Tuesday, Stanley reiterated his “Buy” rating and raised his target price from C$55 to C$64 per share, reflecting a projected 12-month return of 81 per cent.

Florida-based Trulieve, which grows and produces cannabis and cannabis products in the US with branded retail and presence across now six states, released its third quarter results on Tuesday. The company hit record quarterly revenue of $136.3 million, up 93 per cent year-over-year and up 13 per cent sequentially, and adjusted EBITDA of $67.5 million, up 83 per cent from a year ago and up 12 per cent from the Q2. (All figures in US dollars except where noted otherwise.)

On the quarter, CEO Kim Rivers said Trulieve has never been better-positioned. The company recently completed Pennsylvania acquisitions of PurePenn and Solevo Wellness, were awarded a processor permit in West Virginia, giving it presence in six states (Florida, Pennsylvania, California, Massachusetts, Connecticut and West Virginia). TRUL also celebrated being first-to-market with medicinal edibles in Florida.

“Our third quarter was especially memorable because we introduced the long-awaited edibles product lines to our offerings and announced our acquisitions in Pennsylvania, where we see tremendous growth potential,” said Rivers in the third quarter press release. “We also recently achieved our 2020 goal of opening 68 stores nationwide and expect our strong growth to continue. Going forward, we will continue to provide best-in-class customer experiences for our Trulievers while strategically expanding our operations to accelerate growth.”

Trulieve’s share price has shot up in recent months and is hitting all-time highs this week. Year-to-date, TRUL is now up 130 per cent.

The company’s Q3 $136-million and $67-million in revenue and EBITDA, respectively, beat Stanley’s estimates of $129 million and $60 million, respectively, with the analyst noting that the EBITDA beat came primarily from stronger than expected gross margins.

The analyst said management hasn’t increased its 2020 guidance but that it wasn’t expecting declines over the fourth quarter.

“Prior guidance did not include any contribution from the Pennsylvania acquisitions, which closed last week. During the conference call, management predicted it plans to introduce 2021 revenue targets when it reports its Q4/20 results,” Stanley said.

Stanley said given the impact of tax payments on working capital and cash flow from operating activities (CFO), he sees operating cash flow before working capital (OCF) as a better measure of cash flow performance for TRUL’s Q3.

“On that basis, the 184-bps improvement in the OCF margin to 14 per cent is very impressive, and we expect it to rank amongst the ‘league leaders’ once the reporting season is complete,” Stanley said. “We also expect TRUL to return to being CFO-positive in Q4 with additional growth in subsequent periods. While CFO was negative, the outflow was significantly less than (i.e., better than) we expected. We attribute that to continued improvement in inventory levels.”

Trulieve finished the third quarter with cash and equivalents of $193 million and total debt of $134 million and leases of $131 million, with the company completing over the quarter an equity financing round for proceeds of $83 million. Stanley said given the company’s revenue and earnings forecast, Trulieve’s debt level is “very manageable” and that he company’s balance sheet ranks highly among its cannabis peers.

On a valuation basis, the analyst says that even with its share price gains TRUL is looking attractive, estimating Trulieve to be trading at 8x his 2022 EBITDA forecast, which is 43 per cent under the 14x average of its US multi-state operator peers.

“The technical picture still looks very constructive, with the stock continuing to make new all-time highs supported by strong (but not-too-strong) momentum,” Stanley wrote.

The analyst is calling for full 2020 revenue and adjusted EBITDA of $516 million and $247 million, respectively, and for 2021 revenue and adjusted EBITDA of $848 million and $370 million, respectively.

At the same time, Stanley cautioned that his forecast may prove conservative, as Trulieve management said in the conference call that it’s considering adult-use legalization in its buildout.

“We also note that TRUL reported pro forma revenue that implies the PA operations delivered Q3 revenue of almost $19 million, and year-to-date revenue of almost $39 million, suggesting strong sequential growth in those operations. With these factors in mind, we are introducing 2022 revenue/EBITDA of $1.0 billion/$440 million,” Stanley said.

“TRUL is unique in the space for having a 50 per cent-plus market share in one of the largest cannabis markets in the US, and it continues to deliver industry leading EBITDA and OCF margins. These factors drive the increase in our price target,” Stanley wrote.