Verano is almost a double from here, says ATB Capital

ATB Capital Markets analyst Kenric Tyghe delivered an update to clients on Wednesday on US cannabis company Verano Holdings (Verano Holdings Stock Quote, Chart, News, Analysts, Financials CSE:VRNO), which just expanded its presence in the state of Pennsylvania through the acquisition of The Healing Center. Tyghe said the new addition should be immediately accretive to Verano’s PA business.

Chicago-headquartered Verano is a US multi-state operator with active operations in 11 states including eight production facilities and a portfolio of consumer brands. The company announced on Wednesday a definitive agreement to buy all of the issued and outstanding equity interests of The Healing Center, including three dispensaries in the Pittsburgh metropolitan area.

The price has been set at $110.3 million, which is expected to be paid with about $55 million in cash and $55 million in shares, with half the cash amount payable on closing and the other half within 60 days of closing. (All figures in US dollars except where noted otherwise.)

“After going public last month, Pennsylvania quickly became a priority for targeted expansion, as it will be integral to our future growth plan,” said George Archos, Co-Founder and CEO of Verano, in a press release.

“Upon completion of this deal, pending all required approvals, we will measurably increase our retail footprint, with the addition of three award-winning dispensaries, in a rapidly growing medical market that has signaled it could potentially transition to adult-use. We are fortunate to add a very talented and dedicated local management team as well. They will play a pivotal role in our success in Pennsylvania,” he said.

Verano went public in February via reverse takeover of Majestic Minerals, raising $100 million in the process. Concurrent with the RTO, Verano completed a merger with medical cannabis company AltMed whose MÜV brands of medical cannabis products was launched in 2016 in Arizona and now has 30 dispensaries in Florida and one in Arizona.

The past month and a half has seen a flurry of activity for Verano. The AltMed merger more than doubled Verano’s retail operations, with the company now set on hitting 76 operating dispensaries by the end of 2021. The company then added five more dispensaries and one cultivation and production facility in Arizona, another Chicago dispensary and three stores and a permit for three more in Pennsylvania. In addition, the company closed on March 11 on a C$100-million private placement.

On the financing round, Archos said, “Verano has sustained significant growth since its inception, driven by a combination of organic and acquisitive engagements. The closing of this financing will support our focused strategy of deepening our presence, across our footprint, in order to achieve market-leading positions.”

Commenting on the new deal for The Healing Center, Tyghe wrote, “We consider the acquisition of the Healing Center to be positive to our thesis given: (i) it increases Verano’s pro forma retail footprint in Pennsylvania to nine, which reflects roughly 8.5 per cent of the state’s current dispensary count; and (ii) it is expected to be immediately accretive to the Company’s Pennsylvania operations.”

Tyghe noted that Pennsylvania’s cannabis market stood at a patient count of almost 400,000 at the end of 2020, from an overall population of almost 9.4 million adults residents. That medical market generated about $575.0 million in sales in 2020, up 36.9 per cent from 2019.

Tyghe said with the potential legalization of recreational-use marijuana in 2022 (state Senators introduced a bipartisan bill for legalizing adult-use in February), the PA market is conservatively expected to be worth in excess of $2.0 billion through 2025 at a CAGR of 28.6 per cent. Currently there are 109 operating dispensaries open in the state while the license cap is set at 198 and a total of 26 out of 33 licensed operators currently operational.

“On the addition of the Healing Center’s three dispensaries, which are located in Cranberry Township, Washington and Monroeville, Verano’s total footprint in the state will increase to nine dispensaries under its retail banner (Zen Leaf),” Tyghe wrote.

With the update, Tyghe has reaffirmed his “Outperform” rating for Verano and one-year target of C$42.00, which at the time of publication represented a projected return of 97.7 per cent.

The analyst is calling for Verano’s revenue to go from $229.2 million in 2020 to $748.3 million in 2021 to $1081.2 million by 2022. Earnings are expected to go from an adjusted EBITDA of $99.4 million in 2020 to $301.8 million in 2021 to $459.4 million by 2022.

“Verano is positioned through 2021 to build on its leadership position in Illinois and establish itself as a top three operator in several states, including Florida. While Verano has a presence in 14 markets, we believe its six core markets—Illinois, Florida, Arizona, Pennsylvania, New Jersey, and Maryland—are some of the most catalyst-heavy states in the market through our forecast window,” Tyghe said in his February 28 coverage initiation.