Following the close of a previously reported acquisition, Beacon Securities analyst Russell Stanley has maintained his price target on California-based, vertically-integrated cannabis company Harborside Inc. (Harborside Stock Quote, Chart, News, Analysts, Financials CSE:HBOR)
Integration has officially begun with Sublimation Inc. (“Sublime”) after Harborside purchased the pre-roll brand in June for $43.8 million, with $38.4 million delivered in stock considerations. The purchase is a contributing factor in Harborside’s potential return resting at 167%, with even further potential in the EBITDA currently sitting at 5.8x the Beacon Securities’ forecast for the end of the 2022 fiscal year, a significant discount from the 11.9x average among American operators.
In maintaining his price target of $4.75 a share, Stanley noted many positives associated with the transaction, including Sublime’s presence in California, the world’s largest cannabis market with sales of $4.4B in 2020, a 57% jump from its 2019 figures.
“Sublime is a manufacturer of cannabis products for the wholesale market, with penetration in 500+ dispensaries representing 70%+ of the legal retail footprint in California,” Stanley noted. “Its product suite includes high-potency pre-rolls, as well as vapes and roll-your-own flower kits. The company has produced a revenue CAGR of 70% since 2019, and exited 2020 ranked #1 with a 7.9% share of the pre-roll market in CA.”
Sublime was founded in 2016, and has continued on a strong growth trajectory ever since, with strong positioning in the pre-roll sector, the fastest growing sub-segment in the California cannabis market since 2020.
“We are thrilled to complete this Acquisition and add Sublime’s talent and its 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 the company’s July 2 press release. “With a strong balance sheet and deep cultivation and brand building expertise, our unified company is 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.”
With most of its retail operations concentrated in northern California outside of its Desert Hot Springs location, Stanley views the acquisition as a strong move by Harborside to expand its presence and array of products by capitalizing on a continuously growing market.
“HBOR brings a rapidly growing pre-roll product line in-house, expanding Harborside’s suite of company-owned brands to offer through its dispensary network,” he said. “We understand house brands now represent 12-13% of the company’s retail sales, with that revenue flower-weighted, so the addition of complementary products supports further margin expansion through an improved product mix.”
Sublime also stands to benefit from recently completed upgrades to Harborside’s cultivation facility in Salinas, which included, the installation of blackout curtains, supplemental LED grow lights, and the incorporation of a state-of-the-art environmental control system.
“We are thrilled to officially join forces with Harborside and create a leading California house of brands,” said Ahmer Iqbal, CEO of Sublime, in the same July 2 release. “Together, we can leverage our vast production and retail capabilities to further expand the distribution of our suite of branded products. On behalf of my team, we look forward to commencing the integration process and working together to scale Harborside’s reach.”
Crucially, the upgrades permit year-round cultivation of Harborside products, with yields expected to increase by over 50%, made possible by a non-coastal zoning ordinance in Monterey County, which provides additional flexibility for existing greenhouses to expand cultivation capacity.
“With the recent amendment by the County of Monterey permitting expansion of existing greenhouses, our Salinas Facility is well positioned to grow with demand for our products,” said Travis Higginbotham, Harborside’s VP of Production, in the company’s June 30 press release announcing the completed upgrades. “We have built a strong reputation for supplying high-quality cannabis products and as we move into the second half of 2021, we are excited to continue to fuel our growth.”
With Sublime and its assets now officially in the fold, the focus returns to Harborside’s search for a permanent CEO, which is a potential catalyst for a sharp increase in the organization’s EBITDA, along with refreshed guidance, Q2 results expected in August, as well as future mergers and acquisitions, namely brands with multiple locations in northern and southern California.
Stanley thinks Harborside will post Adjusted EBITDA of $13-million on revenue of $76-million in fiscal 2021. He expects those numbers will improve to EBITDA of $30-million on revenue of $115-million the following year.
Stanley’s price target at press time implied a return of 167 per cent.