Andrew Semple of Echelon Capital Markets is still high on Verano Holdings (Verano Stock Quote, Chart, News, Analysts, Financials CSX:VRNO), reinforcing his view of the company as a Top Pick by maintaining his Buy rating and target price of C$40.00/share in his latest analysis on Monday. At the time of publication, the C$40 target represented a projected return of 122.7 per cent.
The vertically integrated Chicago-based company, which produces and retails adult-use and medical branded cannabis products in the United States, has made a strategic play to expand its Nevada operations as it acquired Sierra Well, another vertically integrated cannabis operation with dispensaries in Reno and Carson City along with a cultivation/processing facility, for $29 million.
Semple views the move as a strong one from the company as it continues to put down roots in the Silver State, particularly with this acquisition being viewed as accretive with a 5x valuation on the company’s 2021 EBITDA figures.
“The Sierra Well acquisition shows Verano continues with its solid M&A strategy of acquiring top-performing businesses in limited license markets,” Semple said. “Sierra Well’s dispensaries are noted by management to be top performing stores in the cities of Reno and Carson City and have operated profitably for most of their history.”
The $29 million consideration consists of $5.6 million in cash and about 1.54 million Verano subordinate voting shares, implicitly valued at C$19.11/share. (All figures in US dollars except where noted otherwise.)
Verano also views the purchase as a natural progression in terms of maintaining momentum in the US Southwest, with the expanded Nevada operation providing strong support for one of the company’s strongest operating footholds in Arizona.
“We’ve been operating successfully in Nevada since 2017 and have maintained focus on growing our presence in this highly attractive state. Following completion of this accretive transaction, Nevada will become a core market for us. We are pleased to strategically expand our distribution in Nevada while partnering with a like-minded ownership group that has built a profitable business through sound operational management,” said George Archos, Verano Founder and CEO in the company’s July 26 press release.
“We look forward to expanding Verano’s retail presence into Northern Nevada and bringing our house of premium brands to more patients and consumers in a region that’s rife with natural beauty and draws significant tourism from around the country,” Archos said.
The acquisition also gives Verano more momentum for its future projections, with Semple now forecasting revenue of $823.9 million for the company in 2021, which would represent a sharp spike from its reported $228.5 million in revenues for 2020. 2022 appears even more prosperous, with Semple forecasting Verano to eclipse $1 billion in annual revenues, with gross margin moving above 60 per cent in that time.
The company’s adjusted EBITDA is also forecast to jump, with Semple projecting $373.3 million for 2021, a big leap from the $107.1 million reported in 2020, with another projected spike to $580.8 million estimated for 2022.
Semple also forecasted a drop in Verano’s valuation ratios, with the EV/Sales multiple projected to fall from the reported 19.6x in 2020 to 5.4x in 2021, well below the 12.2x multiple target. 2022 has a similar forecast, with Semple calling for the multiple to drop to 3.7x, below the target of 8.2x.
On the EV/EBITDA side of things, Semple is also projecting a drop, as he foresees a move from 41.7x in 2020 to 12x in 2021, which falls under the target of 26.9x. 2022 tells a similar story, with a projection of 7.7x EV/EBITDA coming in below the target of 17.3x.
Verano has been a busy organization throughout the month of July, starting on July 9 by expanding its operations in Ohio with the acquisition of Mad River Remedies, a dispensary location in Dayton, which brings Verano to the state maximum of five operational dispensaries.
The company followed it up by announcing a licensing agreement on July 12 with Shoppers Drug Mart to sell its Atlas Thrive-branded products through its MUV brand in Shoppers’ online store, with plans to expand into brick-and-mortar locations in the near future.
That same day, the company also officially closed acquisitions of Pennsylvania-based cannabis producers Agri-Kind, Agronomed Holdings Inc. and Agronomed Biologics, which were previously announced on April 22.
Continuing in Pennsylvania and its $1 billion medical marijuana market, the company also opened its 11th dispensary in the state in Philadelphia under the Zen Leaf brand, with plans to open a 12th dispensary, the Healing Research Center in Pittsburgh, on Friday.
With second quarter financial results to be reported on August 10, Semple sees the Sierra Well acquisition as having a positive impact on the company’s bottom line.
“We view the transaction to be of strategic importance to Verano’s Nevada business,” he said. “It nearly doubles its business in Nevada, secures additional retail licenses in this limited license state, expands operations to the northern region in Nevada, and enhances Verano’s vertical integration there.”
At the time of publication, Verano Holdings was trading at $17.63/share on the Canadian Securities Exchange, down 18 cents from its Tuesday opening of $17.81/share.