Echelon analyst Andrew Semple likes the looks of two new acquisitions by cannabis company Ayr Strategies (Ayr Strategies Stock Quote, Chart, News, Analysts CSE:AYR.A). In an update to clients on December 23, Semple reiterated his “Buy” rating while raising his target price from C$43.00 to C$53.00, which represented at press time a projected 12-month return of 90.3 per cent.
It’s been a busy month for Ayr Strategies, which has operations in Nevada and Massachusetts including three cultivation and/or processing facilities along with seven cannabis dispensaries across the two states. The company closed on an issuing of $110 million in senior secured notes, firmed up its merger agreement with Parma Wellness Center for $17 million, completed the acquisition of Pennsylvania-based CannTech for $57.4 million and announced agreements to acquire Florida-based Liberty Health Sciences for $290 million and New Jersey licensed operator Garden State Dispensary for $101 million. (All figures in US dollars except where noted otherwise.)
On the latter two proposed transactions, Ayr Strategies chairman and CEO Jonathan Sandelman said they represent a transformational next step for Ayr, arguing that 2021 will be a year of material growth in the adult-use market for Ayr.
“Our strategy has always been to go deep in the best markets, targeting attractive assets in limited-license states with large populations, where we can build a vertically integrated presence and have a significant edge. New Jersey will be a leading force in adult-use legalization in 2021, and we look forward to working with the regulators to ensure a safe and robust roll-out of the adult-use program. Florida has one of the country’s most robust and rapidly growing medical programs, and we are acquiring one of the largest operators in terms of store count,” said Sandelman in a December 22 press release.
The Liberty Health transaction is set to be a stock-for-stock deal giving Liberty shareholders 0.03683 Ayr shares for each Liberty share, equating to about 13.1 new Ayr shares. Currently the fifth-largest cannabis company in Florida, Liberty’s assets include a 387 acre cultivation facility in Gainesville, Florida, with over 300,000 sq ft currently in operation, 28 open retail dispensaries and seven ready-to-open, along with seven more currently under construction.
Garden State is one of 12 existing vertical license holders in New Jersey and has three open dispensaries and 30,000 sq ft of cultivation and production facilities in operation along with 75,000 sq ft currently under construction.
On the two new deals, Semple views them positively, saying they will allow Ayr to enter two excellent, sizeable and limited-license markets.
“We view the acquired assets to have a longer runway for growth than the Company’s existing asset base, implying that these assets deserve a premium multiple relative to Ayr’s current portfolio. However, we leave our DCF valuation parameters unchanged, which we believe positions our model even more conservatively than previously,” the analyst wrote.
On the Liberty Health deal, Semple noted the 94 per cent premium at which it’s set, based on pre-announcement closing prices, and commented that it’s likely to receive Liberty shareholder approval, calling it a potentially highly accretive transaction for Ayr.
Regarding the Garden State deal, with adult-use sales to commence in late 2021, Semple said he has a very bullish outlook on New Jersey medical cannabis operators who could reap the benefits of the new market. On Garden State’s three medical dispensaries already in operation, the analyst judged them to be likely very productive and could be generating current sales of $9 to $12 million per location despite being supply constrained.
Overall, Semple said with six transactions yet to close, now’s likely the time Ayr will start focusing on integration and operations and, aside with the prospect of smaller tuck-ins, quit with the acquisitions for a while.
“We reiterate our Buy rating, Top Pick status, and increase our target price to C$53.00 per share based on our DCF valuation of C$52.70 per share (previously C$43.11). Our target price increase is due to incorporating the pending acquisitions into our financial forecasts. We continue to view our target price as conservatively positioned given the upside potential to our financial forecasts, spare cash at the ready for investment, and the conservative valuation parameters used in our DCF model. However, failure to close any of the six pending acquisitions could negatively impact our outlook,” Semple said.
Semple has updated his forecasts and is now estimating Ayr to generate 2020 revenue and adjusted EBITDA of $154.7 million and $55.9 million, respectively, 2021 revenue and adjusted EBITDA of $350.3 million and $135.7 million, respectively, and 2022 revenue and adjusted EBITDA of $612.2 million and $272.6 million, respectively.
Year-to-date, Ayr’s share price is up 155 per cent.
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