Harborside wins price target increase from Beacon Securities

A new acquisition by California-based cannabis company Harborside (Harborside Stock Quote, Chart, News, Analysts, Financials CSE:HBOR) checks multiple boxes, says Beacon Securities analyst Russell Stanley. In an update to clients on Tuesday, Stanley reasserted his “Buy” rating for HBOR while upping his price target to C$4.75 (previously C$4.00), which at press time represented a projected 12-month return of 105 per cent.

Harborside, which is one of the oldest cannabis retailers in California and operates three dispensaries in the San Francisco Bay Area, shops in Palm Springs and Oregon and a cultivation and production facility in Salinas, California, announced on Tuesday a definitive agreement to acquire Oakland-based manufacturer Sublime for $43.8 million.

The deal, which has been approved by both boards, would include $38.4 million in HBOR stock and $5.4 million in cash, $3.8 million of which would be used to repay debt. Sublime is known for its Fuzzies brand of high-quality, high-potency pre-rolls, which currently command an eight-per-cent share of California’s pre-roll market, putting it at #1 in the state. (All figures in US dollars except where noted otherwise.)

Harborside said it expects significant synergies to come out of the acquisition, which will allow Sublime to make use of Harborside’s high-quality cannabis grow in Salinas.

“This acquisition adds an iconic, award-winning California brand with an exceptional product offering and consumer following to our growing brand portfolio,” said Peter Bilodeau, Interim CEO of Harborside, in a press release.

“Harborside has been a customer of Sublime for many years and we know the quality of their products. With the existing production capacity and soon to be completed upgrades at our Salinas cultivation facility, we are well-positioned to support the continued growth of the Sublime brands while expanding the reach of Harborside’s existing branded product portfolio in both the retail and wholesale markets, which we expect to ultimately drive increased profitability across our entire business,” he said.

Harborside had a great 2020, returning 193 per cent for the year, and has done pretty well so far in 2021, as well, and is currently up 17 per cent.

But Stanley sees more upside, saying the Sublime purchase will expand the company’s margins through vertical integration.

“The transaction marries HBOR’s cultivation in Salinas with Sublime’s manufacturing and distribution capabilities. Sublime’s margins should improve materially by sourcing biomass (specifically, non-premium flower) internally from HBOR’s facility in Salinas, and the sale of Sublime products through HBOR dispensaries offers additional margin capture,” Stanley wrote.

“During this afternoon’s conference call, management added that house brands now represent approximately 12-13 per cent of HBOR’s retail revenue, which is flower-weighted, so the broadening of the company’s product suite to include pre-rolls and other products positions the company well to expand house brands’ share of revenue and support further margin growth,” he said.

Harborside also reported on Monday its first quarter financials, which featured $12.4 million in net revenues and $1.0 million in adjusted EBITDA compared to $13.7 million and $0.4 million, respectively, a year earlier.

Retail operations produced $10.0 million in net revenue compared to $10.2 million a year earlier, while wholesale operations generated $2.4 million for the Q1 compared to $3.5 million for Q1 2020.

The company said retail was hampered by decreased in-store foot traffic due to COVID-19 capacity restrictions, while lower wholesale revenue resulted from lower-than-expected flower yield at the company’s Salinas facility, itself caused by a number of factors including COVID-related disruption in the supply chain for materials, a weather event that damaged the roof over the company’s plants and an unexpected infestation of non-beneficial insects. Harborside finished the quarter with $30.6 million in cash after closing an upsized private placement over the quarter for C$35.1 million.

On the quarterly numbers, Stanley said net revenue of $12.4 million was lower than his forecast of $14.0 million while the $1.0-million in adjusted EBITDA beat his call for $0.0 million. Stanley noted that in the conference call on the Q1, management said the comparison of Q1’s in 2020 and 2021 was a tough one, as March 2020 saw a big swing upwards due to pandemic-related stockpiling.

Harborside has been led for the past year and a half by interim CEO Peter Bilodeau, but the company is now close to arriving at a permanent head. Stanley said Chair Matt Hawkins said on the quarterly conference call that HBOR is “extremely close” to an announcement, with news to be expected sometime this month.

On the way ahead, Stanley thinks HBOR will generate 2021 and 2022 net revenue of $76 million and $115 million, respectively, and 2021 and 2022 adjusted EBITDA of $13 million and $30 million, respectively. The analyst said HBOR is currently trading at a 44-per-cent discount to its closest peers, at 7.5x his 2022 EBITDA forecast versus a 13.4x average among US cannabis operators.