Haywood Capital Markets analyst Neal Gilmer is staying bullish on US multi-state cannabis operator Verano Holdings (Verano Holdings Stock Quote, Chart, News, Analysts, Financials CSE:VRNO) and upped his target price in a company update on Monday. Gilmer says Verano’s continued expansion through M&A positions it to be one of the leading MSOs in the country.
Chicago-based Verano, which listed on the CSE in February through a reverse takeover, announced on Monday the closing of three previously announced acquisitions in the state of Pennsylvania, taking on six operational dispensaries and a licence to open three more. Verano has now closed on six of ten transactions it has announced since its listing date.
The new purchases include three TerraVida medical dispensaries and three under The Healing Center brand, with Verano saying it will merge in Pennsylvania with these new operations into TerraVida Holistic Centers, with TerraVida’s management remaining in place to build on Verano’s presence in Pennsylvania. The cost of the deals was $62.5 million in cash and 3.0 million in shares for TerraVida, $55.2 million in cash and 2.8 million shares for The Healing Center and $7.4 million in cash and 1.3 million shares for the NSE Pennsylvania licenses. (All figures in US dollars except where noted otherwise.)
In his update, Gilmer said the speed of announcements and closings from Verano demonstrates an ability to execute to plan.
“The Pennsylvania market has become increasingly attractive for both its robust medical market and potential to legalize recreational use in the near future,” Gilmer wrote.
Gilmer referred to an MJBiz Factbook which estimates PA’s medical market at 528,000 patients, which would trail only Florida as the second-largest medical market in the country by patient count with sales potentially reaching $925 million in 2021.
On Verano’s four remaining transactions, two are in Pennsylvania, one in Illinois and one in Ohio, with the PA one adding 62,000 sq ft of cultivation capacity and a permit to open six medical dispensaries and an additional cultivation and processing facility. The Illinois transaction will add two operating dispensaries and the Ohio transaction is for an operational dispensary in Dayton which would give Verano the maximum permitted five stores in the state.
“Verano is poised to be one of the leading multi-state operators in the US following its acquisition of AltMed Enterprises and go-public transaction,” Gilmer wrote. “The company continues to expand rapidly into new markets through acquisitions and license wins as well as organically within its core markets. The vertically integrated company offers a portfolio of four CPG brands that combined have over 150 SKUs covering an impressive variety of formulations, which are primed for expansion into new markets within Verano’s existing footprint.”
Last week, Verano announced its first quarter 2021 results, which featured revenue up 117 per cent year-over-year to $143 million and adjusted EBITDA of $75 million. Over the quarter, Verano completed acquisitions in Arizona and brought in C$100 million through a private placement.
“Our strong first quarter performance was foundational in nature and sets the tone for what we expect to be a transformational year,” said George Archos, Verano CEO and Founder, in a May 18 press release. “We anticipate considerable quarter-over-quarter growth in 2021 as we begin to realize the impact of accretive acquisitions we’ve made over the last few months, in addition to broad expansion of cultivation capacity and organic retail growth.”
Looking ahead, Gilmer thinks Verano will generate revenue in 2021 and 2022 of $857.7 million and $1,303.7 million, respectively, and EBITDA of $376.4 million and $574.6 million, respectively.
Verano’s share price has dropped since its debut and currently trades around C$24.00, but Gilmer thinks there’s plenty of upside potential. With his update, the analyst has reiterated his “Buy” rating for VRNO and raised his target from C$36.00 to C$38.50, which at the time of publication represented a projected one-year return of 62 per cent.
Gilmer estimates Verano to be currently trading at 10.6x his 2022 EV/EBITDA estimate (and at 10.4x the consensus estimates), which compares to its Tier One US MSO peers at 11.8x, excluding the high and low. The analyst’s target comes from a 20x EV/EBITDA multiple on his 2022 EBITDA and discounted by 15 per cent.
“The company has been profitable since it was founded and is expected to continue operating with strong margins,” Gilmer wrote. “Verano’s long history and depth in their core markets such as Illinois, Florida and Maryland allow for operations to be optimized. Early-stage exposure into key growth markets such as Arizona and New Jersey position the company for strong growth in the second half of 2021 and into 2022.”
“Verano has ambitious expansion plans in 2021 to drive revenue growth both in core markets as well as developing markets,” Gilmer said. “Furthermore, we believe the company will be opportunistic on the acquisition front to go deeper in its existing markets.”
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