US multi-state operator Columbia Care (Columbia Care Stock Quote, Chart, News, Analysts, Financials CSE:CCHW) continues to look very attractively valued, according to Echelon Capital Markets analyst Andrew Semple, who delivered an update to clients on Friday. Semple has reasserted his “Buy” rating and C$14.00 target, which at the time of publication represented a projected 12-month return of 108.0 per cent.
New York-based Columbia Care has licenses in 18 US jurisdictions and the European Union, operating 122 facilities including 92 dispensaries and 30 cultivation and manufacturing facilities. The company announced on Friday the completion of its acquisition of privately-held cannabis MSO Green Leaf Medical, which has a leading market presence in the mid-Atlantic region.
The deal was for $240 million made up of $45 million in cash and $195 million in Columbia Care stock, along with potential additional performance-based milestones in 2022 and 2023. (All figures in US dollars except where noted otherwise.)
Green Leaf is one of the largest and most scaled cultivators and processors in the state of Pennsylvanaia, with a 274,000-sq-ft cultivation and processing facility and acts as one of the state’s largest wholesalers with products sold in about 85 per cent of the state’s 100 operating dispensaries.
In Maryland, Green Leaf has a 42,000-sq-ft cultivation facility, a separate processing facility, two operating dispensaries and has one of the state’s largest wholesale operations. In Virginia, Green Leaf is the largest cultivator in the state, with an 82,000-sq-ft facility in Richmond, while in Ohio, Green Leaf has one retail dispensary and operates a 63,000-sq-ft facility.
First announced this past December, the deal secures Columbia Care’s position as a national leader, said CCHW CEO Nicholas Vita.
“Green Leaf’s proprietary gLeaf brand, cultivation and production scale, and outstanding reputation and culture are exceptional complements to the Columbia Care operational footprint in these key markets,” Vita said.
“Together, we will accelerate and expand our strategy of offering the best products and service to these rapidly expanding medical markets and will be well-positioned in states that are preparing for adult-use, such as Virginia,” he said.
Looking at the deal, Semple said it will give Columbia Care the maximum licenses permitted in Ohio and Maryland and a leading business in both Pennsylvania and Virginia. Semple also said it should be immediately highly accretive to Columbia Care shareholders with room for further upside if industry demand continues to grow at a robust pace or if adult-use sales are approved in Pennsylvania, Maryland or Ohio.
“Green Leaf fits like a glove with Columbia Care’s geographic and strategic priorities,” Semple wrote. “This acquisition is aligned with the Company’s strategic focus on building meaningful scale in key markets, which we believe accelerates its profitability ramp.”
“[The acquisition] provides the Company with enhanced wholesale capabilities and a strong portfolio of branded cannabis products, which are areas of its business that Columbia Care has been heavily investing into,” Semple said. “We are also encouraged to see Columbia Care double down on some of America’s most attractive cannabis markets, characterized by limited license regulatory regimes, sizeable populations, the conditions for robust medical markets, and adult-use upside opportunities.”
While Semple had already incorporated Green Leaf’s acquisition into his forecast but he said closing the transaction provides more clarity for his outlook over the second half of 2021. The analyst is estimating EBITDA contribution of about $75 million from Green Leaf in 2022 as a conservative call.
“We expect to see strong contribution from Green Leaf beginning in H221, which will be accretive to sales, EBITDA, cashflows and margins,” Semple said. “We see further upside to sales/EBITDA contribution in 2022 with the 174,000 sq ft expansion to the Pennsylvania production facility online, additional production in Maryland and Virginia, six new store openings across Maryland and Virginia, and with an expanded medical cannabis program in Virginia with dried flower sales expected to begin in Q421.”
Semple is forecasting CCHW to generate revenue in 2021 and 2022 of $499.3 million and $805.5 million, respectively, and adjusted EBITDA in 2021 and 2022 of $94.4 million and $236.4 million, respectively.
CCHW climbed with the rest of the sector over the second half of 2020 and into the start of 2021, while the stock has trailed off since early February.
Semple estimated that at C$6.73 per share CCHW is currently trading at 2.7x and 9.1x of 2022 sales and EBITDA multiples, respectively, which he sees as attractively valued.
“We do not believe a single digit forward EBITDA valuation is justified following the Company’s much improved operational and financial performance over the past nine months, closing of the Green Leaf transaction, and exciting adult-use opportunities ahead,” Semple wrote.
“We also note the Company’s relatively high degree of exposure to medical markets, which have yet to experience the full benefit of transitioning to adult- use sales, would imply its portfolio of assets has more potential upside over the long term, suggesting that Columbia Care could deservedly trade at a premium to the peer group 2022 EV/EBITDA multiple,” he said.
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