Harvest Health & Recreation wins price target raise at ATB Capital

Arizona looks to be opening its adult-use market sooner than expected, which is good news for Harvest Health & Recreation (Harvest Health & Recreation Stock Quote, Chart, News, Analysts, Financials CSE:HARV), according to ATB Capital Markets analyst Kenric Tyghe. In an update to clients on Wednesday, Tyghe reiterated his “Outperform” rating while raising his one-year target from C$3.25 to C$5.00 per share.

Tempe, Arizona-based Harvest Health is a vertically integrated multi-state operator with adult-use and medical stores and is currently operational in nine US states with 38 dispensaries and 24 cultivation and production facilities. Harvest Health has 15 stores in its home state of Arizona along with a growing presence in Florida, Pennsylvania and Maryland.

This past November, Arizona, which has one of the stronger medical markets in the US, voted to approve Proposition 207 which legalizes the sale and possession of one ounce or less of cannabis for non-medical purposes, with the age restriction being set at 21 years.

The expected start time for rec cannabis in Arizona has seemingly been moved up, with stores potentially opening in as soon as one week. Importantly, Arizona’s current medical pot sellers like Harvest Health reportedly hold the advantage in that there will be an initial maximum of 130 vertical rec licenses available with current medical pot shops (there are about 120 of them) expected to gain medical licenses, leaving only a handful to newcomers.

Things are looking better at the US federal level, as well, where a new Biden administration combined with Democratic control of both houses raise the chances of the US passing some version of the SAFE and MORE Acts in upcoming months.

The SAFE Banking Act would essentially allow banks to work with cannabis businesses without fear of punishment or reprisal, while the MORE Act (the Marijuana Opportunity Reinvestment and Expungement Act) would remove marijuana’s status as a Schedule 1 controlled substance and bring in related reforms including expungement of past convictions and allow for the taxation of cannabis. The SAFE Act was passed by the US House of Representatives in September 2019 while the MORE Act passed the House of Representatives last month, with both Acts still to pass the Senate.

Nevertheless, the path looks clearer for legislative reform, according to Tyghe who revised his estimates higher for HARV and altered aspects of his valuation metrics due to both the earlier than expected rec start date in Arizona and what he called the improved path and visibility to the passing of some form of the SAFE and MORE Acts during the next 12-18 months, along with a potential advance of the timeline for federal legalization with the Democrats controlling both Houses.

“The headlines as it is related to the broader cannabis market have necessarily been dominated by the potential pull forward of Federal legalization of cannabis in the United States given the Democratic control of both houses. The reality as it relates to U.S. MSOs is that the more relevant window and reset relates to the expected passage of the SAFE and MORE Acts. In terms of Harvest, the most relevant headline that has largely been overlooked is that recreational use cannabis sales in Arizona could start as early as this week,” Tyghe wrote.

The analyst has left his 2021 and 2022 revenue estimates relatively unchanged at $381.4 million and $449.7 million, respectively, while upping his adjusted EBITDA estimates to $76.1 million from $71.1 million for 2021 and to $98.4 million from $87.6 million from 2022. (All figures in US dollars except where noted otherwise.)

Like much of the cannabis sector, HARV had a good back end to 2020 but the stock still finished the year down 34 per cent. The stock is up 42 per cent over the first few weeks of 2021, however. At press time, Tyghe’s new target of C$5.00 represented a projected return of 28.2 per cent.

“The U.S. MSO group has re-rated on: (i) market dynamics, (ii) the perceived further de-risking of the industry and (iii) an increased access to capital. The relevant peer group is trading at 15.0x 2022e EBITDA, supporting an increase in our target multiple to 18x (from 15x prior) given Harvest’s absolute and relative footprint and positioning. We further believe that our new WACC of 10.2 per cent (versus 12.4 per cent prior) better reflects the risk adjusted outlook for Harvest in the context of recent headlines,” Tyghe said.

Harvest Health last reported its financials on November 10, 2020, where the company saw total revenue jump 86 per cent year-over-year and 11 per cent sequentially to $61.6 million for its third quarter. Adjusted EBITDA excluding biological adjustments was $10.5 million compared to negative $10.9 million a year earlier and $4.1 million for the previous quarter. At the time, management was targeting full-year revenue to be $225 million, up from its previous guidance at between $215 and $220 million.