Verano Holdings is a buy, says Haywood

Haywood Capital Markets initiated coverage on Wednesday of newest cannabis kid on the block, Verano Holdings (Verano Holdings Stock Quote, Chart, News, Analysts, Financials CSE:VRNO), with analyst Neal Gilmer starting the stock off with a “Buy” rating and C$33.00 target. Gilmer says Verano’s core strength in key US markets and ambitious expansion plans make for an attractive combination.

Verano is a US multi-state operator headquartered in Chicago, with currently 54 operating retail stores across 11 states and licenses to operate in up to 14 states. Verano just completed its go-public transaction on Wednesday via reverse takeover of Majesta Minerals and concurrently raised $100 million at a price of $10.00 per share as part of the RTO.

Verano was set to be bought by Harvest Health & Recreation after a proposed $850-million deal was struck in 2019 at the height of the boom in cannabis. But the acquisition was called off in March of last year through a mutual termination with Harvest Health’s share price in steep decline.

Verano itself announced on February 11 a merger with medical cannabis company AltMed, a deal first announced this past November. AltMed has vertically integrated operations in Florida and Arizona with a full suite of cannabis products and retail outlets under the MÜV brand, with 31 stores in Florida and one in Arizona.

“Verano is a leading US MSO with established operations across 11 states with licenses to operate in 14 states,” wrote Gilmer in his report. “The company has exposure to six core markets that should drive material growth in 2021. The recently completed acquisition of AltMed gave the company exposure to the Florida and Arizona markets, two coveted markets Verano did not have exposure to. The company has vertically integrated operations and aspires to be an influential cannabis brand.”

As for Verano’s markets, Gilmer noted that the Illinois market had a strong 2020, with expectations of continued success in its adult-use market, while both New Jersey and Arizona will be bringing adult-use online this year (Arizona began in January, ahead of schedule). The analyst said Pennsylvania looks also to be headed in the rec cannabis direction, while Florida’s medical market continues to shine — and with the AltMed acquisition, Verano is now a top four operator in the state.

Considering how well the cannabis market has been performing of late, Gilmer called Verano a catch-up trade.

“Verano launched an equity financing on December 3, 2020, at a price of $10.00 that raised $100 million for the company. Since that time, the price of its most comparable peers has appreciated materially,” Gilmer wrote.

“On average, Tier 1 US MSOs’ share price has increased by 64 per cent from December 3 through to February 16, the day prior to Verano’s public listing. As a result of the performance of the overall group and adjusting for trading in Canadian dollars, the implied price would be approximately C$21.00, using the large-cap peer average return of 64 per cent and an exchange rate of 1.27,” he wrote.

Key to Gilmer’s investment thesis is Verano’s core market strength and its expansion into new markets via acquisitions and license wins. The company’s retail presence more than doubled with the AltMed acquisition, Gilmer said, and Verano plans to hit 76 operating dispensaries by the year end. That will allow it to capture more of the value chain, says Gilmer, and to increase the market presence of its house of brands. Gilmer said Verano is likely to be opportunistic on the M&A front in going deeper in its existing markets, while at the same time the company has identified key developing markets in Massachusetts, Ohio, Nevada, Michigan and Arkansas.

Looking at the numbers, Gilmer estimated Verano’s pro-forma cash position at about $135.6 million with about $83.5 million in total debt of which $41.5 million is due in the next 12 months. For the full 2020 year, Gilmer has estimated Verano’s revenue and EBITDA at $227.0 million and $102.6 million, respectively. For 2021, he is calling for revenue and EBITDA of $690.0 million and $268.6 million, respectively, and for 2022, he is forecasting $1,026.4 million in revenue and $432.9 million in EBITDA. (All figures in US dollars except where noted otherwise.)

Gilmer’s C$33.00 target stems from a 20x multiple of his 2022 EBITDA estimate discounted by 15 per cent.

“The range of Tier 1 and Tier 2 US cannabis companies trade between 13x and 20x next year’s EBITDA,” Gilmer said. “Verano has a presence in core markets that should drive strong growth through our investment horizon. In addition, our EBITDA estimate could prove conservative should the company achieve margins exceeding our estimates. Verano trades at 6.6x our 2022 EBITDA estimates based on its last financing at C$12.70 versus the Tier 1 US MSO peer group at 13.6x, excluding the high and low and using our estimates for Verano.”

At press time, Gilmer’s C$33.00 target represented a one-year projected return of 159.8 per cent.