VEXT Science has 257% upside, Beacon says

A new beverage agreement looks good on Arizona-based cannabis company VEXT Science (VEXT Science Stock Quote, Chart, News, Analysts, Financials CSE:VEXT), according to Beacon Securities analyst Russell Stanley, who delivered an update to clients on Tuesday. Stanley reiterated his “Buy” rating and C$2.75 target price for VEXT, saying the stock is currently trading at a steep discount to its industry peers.

Vertically-integrated VEXT Science provides services to wholesale operations in Arizona and its two Herbal Wellness Center dispensaries in the Phoenix area. The company has cultivation facilities in Phoenix and Prescott Valley and is currently expanding into other states through joint venture agreements.

VEXT on Tuesday announced a Memorandum of Understanding with SōRSE Technology to exclusively produce and sell SōRSE’s MAJOR cannabis-infused beverages in Arizona. SōRSE is a leader in water-soluble emulsion technology for integrating functional ingredients into commercially available products, while MAJOR is a high-dose THC beverage that was the top-selling cannabis beverage brand in the US over the first quarter of 2021.

Under the agreement, SōRSE will provide its know-how and formulations and VEXT will cover manufacturing, storage and sales to its two dispensaries and to the wholesale market and VEXT will have the opportunity to develop additional products under its Vapen brand using SōRSE’s other formulations and emulsions.

“SōRSE’s proprietary infusion technology and know-how powers some of the top cannabis beverage brands in the US today, and we are excited to announce this deal to bring MAJOR beverages – produced and sold by Vapen – to consumers in Arizona,” said VEXT CEO Eric Offenberger in a press release.

“Our in-house Vapen brand is consistently one of the top brands in Arizona, with prominent placement in both our operated Phoenix dispensaries as well as the vast majority of third-party dispensaries in the state. Beverages are a key growth segment and will round out Vapen’s offering of concentrates, extracts, edibles, vapes, topicals and tinctures,” Offenberger said.

By the terms of the deal, VEXT will pay an initial $100,000 royalty upon entering a final agreement and then a fixed pricing for emulsion and per unit of production.

Stanley wrote that while he is leaving his estimates and valuation unchanged for the time being, he is viewing the announcement positively.

“VEXT already offers the wholesale market a comprehensive suite of concentrates, extracts, edibles and vapes but it was missing a top line beverage product. This agreement significantly compresses time-to-market for a complementary product line with proven market success, at significantly lower cost/risk versus attempting to develop a comparable product internally,” Stanley wrote.

Stanley is estimating VEXT’s 2021 revenue and adjusted EBITDA at $45 million and $16 million, respectively, and its 2022 revenue and adjusted EBITDA at $71 million and $28 million, respectively.

At the time of publication, Stanley’s C$2.75 target represented a projected one-year return of 257 per cent. (All figures in US dollars except where noted otherwise.)

Comparatively, Stanley sees VEXT to be currently trading at 3.9x his fiscal 2022 EBITDA forecast, which represents a 67 per cent discount to the 11.9x average among US cannabis operators. Up ahead, the analyst pointed to potential catalysts in updates on expansion in Ohio, the company’s second quarter results due in August and potential M&A activity.

“We understand VEXT already has an 80-per-cent-plus penetration of Arizona’s 124 operating dispensaries. We further understand that the Arizona beverage market is still relatively open. As discussed in our May 20th note, VEXT recently completed development of a dedicated facility that expands its manufacturing space by 4x, giving it ample capacity to support production,” Stanley wrote.

VEXT had signed a letter of intent in March to set up a cannabis retail presence in Ohio through a joint venture with an Ohio limited liability company. VEXT has had its Vapen brand available to medical marijuana patients in Ohio starting in 2020.

“As a limited-license state with a large population and growing medical market, Ohio has the return on capital characteristics we look for, and we expect it to become an important cannabis market as it continues to develop,” Offenberger wrote in a press release.

“As a company, we are following a differentiated approach to expansion outside of our home market of Arizona, with a focus on partnering with existing entities in limited-license states and bringing the power of our award-winning Vapen brand and manufacturing expertise to the table,” he said.

“We are currently active in six states outside of Arizona and expect these relationships to progressively add to our results and generate value as we continue to focus on profitable growth,” Offenberger said.

VEXT Science last reported its financials in late May where its first quarter 2021 posted revenue of $9.2 million compared to $4.1 million a year ago and $6.4 million for the previous quarter. Adjusted EBITDA was $3.1 million compared to a loss of $74,717 a year ago and positive $2.4 million for the previous quarter.