Beacon Securities stays bullish on Curaleaf

Beacon Securities analyst Russell Stanley remains positive on Curaleaf Holdings (Curaleaf Stock Quote, Chart, News, Analysts, Financials CSE:CURA), after the company’s latest acquisition in the US cannabis space. In an update to clients on Monday, Stanley maintained his “Buy” rating and target price of C$25.00/share for a potential return of 71 per cent.

Headquartered in Wakefield, Mass., Curaleaf Holdings is a vertically integrated cannabis operator in the United States with 109 dispensaries, 22 cultivation sites and 30 processing facilities across 23 states, which covers an aggregate population of 192 million.

Stanley’s latest analysis comes after Curaleaf officially closed on the previously reported acquisition of Los Suenos Farms, the largest biomass producer in Colorado.

“In the immediate term, the transaction vertically integrates CURA in CO, allowing it to self-supply its Select wholesale operation while adding retail,” Stanley said. “On a longer-term basis, management expects this platform to become increasingly valuable if/when interstate commerce is allowed.”

The acquisition is valued at $67 million (all figures in US dollars unless otherwise noted), and is built on $41 million in stock, $19 million in cash upon closing, with the remaining $7 million coming as a five-year debt, with an additional $8 million payout possible based on 2022 operating cash flow targets.

With the acquisition, Curaleaf adds 66 acres of licensed and equipped outdoor cultivation footprint, an 1,800-plant indoor facility, and two adult-use dispensaries as it aims to make headway in Colorado, the second-largest cannabis market in the United States with $2.2 billion in legal sales in 2020. Based on 12 per cent year-over-year sales growth reported by the Colorado Department of Revenue in July, the market could reach $2.5 billion in 2021, the ninth year of operation for the state’s adult legal-use market.

“We’re very excited about the closing of the Los Sueños acquisition. The vertical integration of our business in Colorado significantly strengthens Curaleaf’s market presence in the second largest state cannabis market in the U.S.,” said Boris Jordan, Executive Chairman of Curaleaf in the company’s October 4 press release. “This deal provides Curaleaf with a high-quality, efficient, and low-cost supply of biomass to support our wholesale and retail customers in Colorado and, once interstate commerce is allowed, on a regional scale. Overall, our newly expanded cultivation capacity will allow us to better serve Colorado’s $2.2 billion annual cannabis market opportunity.”

On top of expanding its cultivation offerings, Curaleaf has been busy in its product development, having recently launched Cliq by Select, its new vape hardware system created after years of research and development. Company management notes that the new system is designed as a high-end, durable hardware option that is easy to use, with Stanley noting that the company is considering initial launches in Arizona, California, and Oregon, with other markets to follow.

The company has also made further retail advancements in New Jersey, having opened a new Curaleaf dispensary in Bordentown, approximately 10 miles south of the state capital of Trenton, as well as launching its Select brand in the state through its Select Bites products.

Stanley’s financial projections have Curaleaf continuing to move forward and expected to double its revenue in 2022 to jump into ten figures at $1.25 billion, with that number slightly below the consensus estimate of $1.3 billion. Stanley projects 2023 to mark a significant step forward for Curaleaf with a projected jump to $2.1 billion in revenue for a projected year-over-year increase of 64.6 per cent, outpacing the consensus projection of $1.9 billion.

Meanwhile, the projections also have Curaleaf’s EBITDA trending upward, with Stanley forecasting $335 million in EBITDA (consensus estimate $369 million) and a 27 per cent margin for 2022 before spiking to $829 million and a 40 per cent EBITDA projection for 2023, outpacing the consensus estimate of $633 million.

Stanley’s valuation data also produces a positive picture for Curaleaf, with the EV/Revenue multiple projected to be halved from the reported 14.1x in 2020 to 7x in 2021, with another projected drop to 4.3x in play for 2022. The EV/EBITDA multiple projections follow a similar path, dropping from the reported 61.4x in 2020 to a projected 26.2x in 2021, then to a projected 10.7x in 2022.

Stanley believes the company has numerous catalysts in place for continued optimism, including further mergers and acquisitions, buildout updates, and the release of the company’s third quarter financial results, currently scheduled for November 8.

“As the largest US cannabis company by market capitalization and footprint, and one of the most liquid based on the average daily value traded, we continue to expect CURA to be a core position for many cannabis investors,” Stanley said.

Overall, Curaleaf’s stock price is down 13.2 per cent for the year to date, reaching a high point of C$22.83/share on February 10.