Arizona pure play cannabis business Vext Science (Vext Science Stock Quote, Chart, News, Analysts, Financials CSE:VEXT) received a target raise from Beacon Securities on Wednesday, with analyst Russell Stanley saying in an update to clients that Vext is set up for some M&A activity.
Vertically integrated cannabis and hemp company Vext Science, which provides services to wholesale operations and two Herbal Wellness Center dispensaries in the Phoenix area, announced on Wednesday three purchase and sale agreements, for two of its currently leased cultivation and manufacturing facilities in Phoenix and Prescott Valley, respectively, and another to acquire a new facility in Eloy, about an hour outside of Phoenix.
Vext said it will pay $7.1 million including $2.2 million in cash on closing and $4.9 million in vendor financing for the two existing facilities and $4.3 million in cash on closing for the Eloy facility, with all three transactions expected to close during the current quarter. (All figures in US dollars except where noted otherwise.)
Vext CEO Eric Offenberger said the purchases will give the company the flexibility to sell into the wholesale market and generate more cash flow, which it can then apply to pursue strategic acquisitions.
“Arizona represents one of the most exciting growth opportunities in the U.S. cannabis market today, and by adding wholly-owned cultivation capacity, we are ensuring that Vext is positioned to maximize its share of this growth through both retail and wholesale channels,” said Offenberger in a press release.
“With the move to adult-use legalization in January and recent expansion announcements in other industries such as semiconductor production, we expect it to become increasingly challenging to find suitable cultivation locations within proximity to key population centres. By owning and expanding our cultivation capacity, we ensure stability of supply and solid margins both for the production of our award-winning Vapen brand, and our operated dispensaries,” Offenberger said.
Vext, whose Vapen brand of THC cartridges, concentrates, edibles and accessories are sold in most of Arizona’s over 100 dispensaries in one of the hottest cannabis markets in the country, also has a line of hemp-based products under both the Pure Touch Botanicals brand and the Vapen CBD brand.
Vext is currently expanding into other states through joint venture agreements. Last month, the company announced a LOI to give it a retail presence in Ohio via a JV with an Ohio limited liability company. That Ohio company has an exclusive option to acquire a provisional cannabis dispensary license.
In February, Vext closed on an oversubscribed public offering for gross proceeds of about $20.7 million, with the company aiming to put the funds towards corporate expansion projects and general corporate purposes.
Looking at the latest news, Stanley said he views the terms of the vendor financing on the purchase of Vext’s Phoenix and Prescott facilities “very favourably,” as they involve relatively low rates with the option for early repayments without penalty.
“We are increasing our price target from C$2.25/sh to C$2.75/sh following the company’s announced plans to acquire additional cultivation capabilities,” Stanley said.
“Strategically, the acquisition of the existing operations ensures long-term control of those assets in an increasingly tight real estate market with limited practical options for new cultivation facilities, while the acquisition of the new facility adds the capacity to support the potential acquisition of retail operations that lack secure access to product,” he wrote.
“Given current expansions underway at the Phoenix/Prescott Valley locations, and the addition of Eloy, we expect VEXT to expand its aggregate canopy from 20,000 sq ft to 58,000 sq ft (a 190-per-cent increase) through 2022,” Stanley said.
By the numbers, Stanley thinks Vext will generate revenue and adjusted EBITDA in full 2020 of $27 million and $6 million, respectively, followed in 2021 by $45 and $16 million, respectively, and followed in 2022 by $71 million and $27 million, respectively.
With the update, the analyst has maintained his “Buy” rating on VEXT, asserting his new target of C$2.75, which at the time of publication represented a projected one-year return of 184 per cent.
“Our new multiple still represents a ten-per-cent discount to the 15x average amongst the largest US operators to reflect the stock’s liquidity, and yet our new price target still implies a potential return-to-target of 184 per cent from current levels,” Stanley wrote.
For the company’s upcoming fourth quarter results (due around April 14), Stanley is calling for revenue of $8.4 million and adjusted EBITDA of $2.7 million. Stanley noted that as per FactSet, his estimates are the only formal forecast published to date. The analyst said he expects VEXT to begin hosting conference calls in upcoming quarters.
As for potential catalysts, Stanley pointed to the Q4 results next week, the closing of the three transactions announced on April 7 and further M&A activity.