Red White & Bloom gets a target cut from PI Financial

PI Financial analyst Jason Zandberg has adjusted his outlook on American cannabis company Red White & Bloom Brands (Red White & Bloom Stock Quote, Chart, News CSE:RWB), lowering his target price from $3.25/share to $2.75/share for a projected 133.1 per cent return while maintaining a “Buy” rating in his most recent report on Wednesday.

Formed in 2019 after MichiCann merged with Tidal Royalty, Red White & Bloom is a multi-state cannabis operation with an emphasis on Michigan, Illinois, Massachusetts, Arizona and California with respect to cannabis, and the US and internationally for hemp-based CBD products.

Zandberg’s reduction comes after Red White & Bloom released its first quarter financials on Tuesday.

RWB reported a topline of $11.8 million compared to $15.7 million for the Q4 2020, with EBITDA of negative $4.6 million. Management said the drop in sales was due to “the manner in which the Company recognizes revenue under IFRS in the state of Michigan for its Platinum Vape branded product sales and a decrease of approximately $1 million due to the strengthening CDN dollar over Q4 2020,” according to the company’s July 27 press release.

But the overall optics are not looking quite as rosy as they previously did, according to Zandberg.

“Although the adjusted revenue was in-line with our expectations, the higher-than-ideal debt levels and the longer than expected timeline to receive Michigan licenses has lowered the valuation in our model,” Zandberg wrote. “The lower peer multiples also contributed to our reduced target.”

As of March 2021, Red White & Bloom’s debt totalled $110.3 million, with $91 million due within the next 12 months, though management indicated $21.7 million of this debt was canceled with share issuance and $64.8 million could be extended.

Another factor in Zandberg’s revisions is that Red White & Bloom has not yet received the proper licensing in Michigan, which limits the company’s revenue streams to its Platinum Vapes, which are the market leader in the state, and MAG. However, the company did indicate on May 27 that it had received pre-qualification for licensing. 

The rating was also influenced by a slower than anticipated acquisition of PharmaCo in Illinois, as well as revenue in Florida not being reported until the third quarter this year, which management says could bring an additional $25 million based on its current footprint. The Florida figures should get a boost with the April 28 acquisition of Acreage Holdings and its property in Sanderson, which includes over 15 acres of land and approximately 11,000 square foot facility for cultivation and a 4,000 square foot freestanding administrative office building.

However, Brad Rogers, chairman and CEO for Red White & Bloom, believes the company is coming closer to getting into full bloom.

“This was another great quarter for the Company as we continued to see strong traction for our brands,” Rogers said in the company’s July 28 press release. “We are building on that momentum and working towards finalizing our revised asset purchase of our Michigan investee to bring their revenue, as well as adjusted sales into IFRS revenue format before the end of this current quarter. Once complete, and the expansion of our Florida operations come on stream, we can finally report in our quarterly results the strength of what we have built and accomplished thus far.”

Red White & Bloom did have its bright spots, with Zandberg noting that the company is reviewing options for expansion into Arizona and California, where Platinum Vapes is already the fifth-biggest brand. The company’s High Times brand is also a potential catalyst for growth, with an aim to further penetrate markets where they currently have licensing agreements through their distribution channels, including a launch in Michigan on June 29.

Zandberg is still optimistic about the company’s financial forecasts, calling for 2021 revenue to hit $141 million compared to 2020’s $23 million with adjusted EBITDA of $19 million compared to a loss of $35 million in 2020. For 2022, Zandberg sees another steep climb in sales, as he projects the company will produce $433 million in revenue with an adjusted EBITDA of $106 million. 

He also views 2022 as the first year where RWB investors can expect a return through earnings per share ($0.08), while other valuation ratios also come into sharper focus. The adjusted EV/EBITDA multiple is forecast to drop from the actual 2021 figure of 25.9x to 4.6x in 2022, while the price-earnings ratio is forecast to start at 17.1x in 2022.

On June 7, the company announced it had secured an additional $44.5 million in financing thanks to multiple transactions, including an agreement to retire $7.7 million in debt through a non-brokered “units for debt” private placement of 8,445,426 units at $1.15/unit.

Overall, Zandberg is still a believer in the company’s potential, though the most recent results slightly tempered his outlook, but at the same time the analyst says multiples for RWB’s mid-cap MSO peers have come down considerably since his last revision.

“We continue to believe that RWB represents an attractive investment but have decreased our target prompted by our revised forecasts and high debt load,” he said.

Red White & Bloom enjoyed a nice rise over the end of 2020 and into 2021, hitting a high of $1.97 in February before starting to move downward. RWB closed Wednesday trading at $1.10/share on the Canadian Securities Exchange, down 8 cents from the previous day.