Cannabis company Jushi has a 95 per cent upside, says Echelon Capital

Echelon Capital Markets analyst Andrew Semple has held his stance on Jushi Holdings  (Jushi Holdings Stock Quote, Chart, News, Analysts, Financials CSE:JUSH), reiterating his “Speculative Buy” rating in a client update on Tuesday, while maintaining a C$12.00/share target.

Vertically-integrated cannabis company Jushi, based in Boca Raton, Florida, targets assets in limited license markets with strong growth potential and where adult-use cannabis has either been legalized or there’s a clear trajectory for the state to do so. The company’s current core markets are in Illinois, Pennsylvania and Virginia, with additional interests in California, Nevada, Ohio and Massachusetts.

Semple’s analysis comes after Jushi released its preliminary financial reports for the second quarter on Monday, showing revenue up 14.6 per cent from the previous quarter to $47.7 million and adjusted EBITDA of $4.6 million. (All figures in US dollars except where noted otherwise.)

“Our second quarter 2021 results demonstrate the strength of our operations, with solid organic revenue growth at the high end of our guidance range and Adjusted EBITDA(A) in-line with our expectations,” said Jim Cacioppo, CEO, Chairman and Founder of Jushi, in the company’s August 2 press release.

“With 20 stores open, four cultivation and production facilities in operation and a diversified medical and consumer brand portfolio, we have built a national footprint for long-term success. In the second half of 2021, we expect to open an additional seven BEYOND / HELLOTM retail stores nationally, add two Nature’s Remedy of Massachusetts, Inc. dispensaries as well as a grower-processor facility in Massachusetts through an acquisition,” Cacioppo said.

The quarterly numbers were in line with Semple’s estimates and the consensus and generating organic revenue growth of 14.6 per cent on a quarter-on-quarter basis while sales more than tripled on a year-over-year basis.

“We made early adjustments to our financial forecasts, though we place more emphasis on the full release of Q221 results expected on August 25 which will provide a clearer picture of the Company’s near-term outlook and strategic priorities,” Semple wrote. “We continue to see room for upside in our valuation on M&A announcements, where Jushi has a solid track record of adding value for shareholders.”

Semple’s revised estimates have Jushi making $47.6 million in revenue with a 46.2 per cent adjusted gross margin for the second quarter, slightly ahead of his initial estimate of $47 million with 46.7 per cent adjusted gross margin and the consensus projection of $46.6 million with 49.4 per cent adjusted gross margin.

However, on account of supply chain disruptions for ongoing facility expansions in Pennsylvania and Virginia, Semple tempered expectations for his forecasts for the second half of 2021 and 2022

“We understand that the delays are due to several input materials needed for construction and are related to both supply chain challenges and the spurt in demand of these primary input products (e.g., steel, aluminum, dry-wall) induced by COVID-19,” Semple said. “The slight delay does not materially impact our longer-term outlook for the business, though it does affect our H121 and 2022 estimates with a greater impact on EBITDA margins than revenues.”

Despite the slight downshifts, Jushi remains in a growth position for the next two years, according to Semple, whose revised 2021 revenue of $216.3 million (down from the original $220.3 million projection) still represents a 168 per cent year-over-year increase from the $80.8 million in revenues from 2020. The analyst’s 2022 projection of $377.9 million (down from the previous call for $385.9 million) would represent a 74.7 per cent year-over-year increase over the 2021 projection.

Jushi still remains an attractive investment from a valuation perspective, says Semple, who projected the company’s EV/Sales to be 5.5x for 2021 (below the target of 11.5x), then falling to 3.1x in 2022. 

The EV/EBITDA multiple is set to experience a more dramatic fall, with Semple forecasting the multiple to be 42.8x for 2021 (below the 89.6x target), then falling to 11.0x in 2022.

On account of expected profitability growth in the second half of 2021, Semple believes Jushi will experience a greater benefit from expanded production capacity in 2022.

“We believe investors should be aware that it is likely that management will update its guidance for 2021 with the release of Q221 results, with potential downward revision to 2021 EBITDA expectations,” he said. “However, we continue to see a clear catalyst to accelerating the profitability ramp through adding production capacity, which although delayed remains a catalyst within a 12-month timeframe.”

At the time of publication, Semple’s $12.00 target represented a projected one-year return of 94.5 per cent.

Jushi recently picked up a win in the courtroom, as it received an interim award of $14.4 million in its case against San Felasco Nurseries, with the award being based on breach of contract and breach of implied covenant of good faith after an American Arbitration Association panel determined San Felasco improperly terminated its Florida franchise agreements with Jushi before selling its cannabis business to Harvest and depriving Jushi of royalties.

“This is the right outcome and highlights the strength of our Company from a legal and business development perspective to successfully navigate through this complicated and highly regulated industry,” Cacioppo said in the July 30 press release. “We look forward to continuing to execute on our strategy to build the leading, vertically integrated operator by expanding our footprint and driving profitability in the markets where we currently operate.”