Verano still trading at a big discount, says Beacon Securities

Russell Stanley of Beacon Securities Verano Holdings (Verano Stock Quote, Chart, News, Analysts, Financials CSX:VRNO), maintaining a “Buy” rating and target price of C$47.00/share for a projected return of 249 per cent in an update to clients on October 20.

Founded in 2014 and headquartered in Chicago, Verano Holdings is a multi-state cannabis operator employing over 2,000 people and serving 14 states, with an addressable market of approximately 150 million customers in core markets like Illinois, Florida, New Jersey, Pennsylvania, Arizona, Maryland, Ohio and Nevada.

Stanley’s latest analysis comes after Verano announced an expansion to its existing credit facility, nearly doubling in size from $130 million to $250 million with an option for an additional $100 million.

“We view the development positively, as it gives the company additional balance sheet flexibility to support organic growth and M&A,” Stanley said.

The company’s credit facility has increased more than sevenfold since May, where Stanley noted an increase from a $30 million facility to the previous $130 million financing. The additional $120 million would pay 8.5 per cent annually and mature in 18 months, with the additional $100 million subject to the same conditions, in comparison to the 9.75 per cent annual rate on the $100 million announced in its previous increase.

A significant portion of the new financing comes from a $50 million investment by AFC Gamma, an institutional lender dedicated to the cannabis space, to increase its overall holdings to $60 million, with Stanley noting that AFC has previously expressed confidence in Verano in labelling them a top-tier credit among MSOs.

“Disciplined capital stewardship has always been a focal point for Verano and a key driver of our signature bottom-line performance,” said George Archos, Verano Founder and CEO in the company’s October 20 press release. “Following the significant growth we delivered over the past two reported quarters, upsizing our credit facility supports further execution of our strategic growth plans and continued value creation for our shareholders. In partnership with Chicago Atlantic, and leveraging Verano’s strong fundamentals, we’ve again lowered our cost of capital on a non-dilutive basis. This transaction dovetails with our short- and long-term objectives to remain acquisitive and expand the Verano platform in both new and existing markets.”

Since the beginning of August, the company has been furthering its footprint within Florida, opening new locations in Bradenton, Tampa, Orange City, and Pinellas Park. All told, 38 of the company’s 86 locations are located within the Sunshine State.

Stanley sees Verano cementing its status as a big-time cannabis player through his future financial projections, as he forecasts a significant increase in revenue to $802 million (all report figures in US dollars unless otherwise indicated) in 2021, which would represent a potential year-over-year increase of 126 per cent. Stanley then sees the company breaking into 10 figures in 2022, with the $1.4 billion projection representing a potential year-over-year increase of 74.8 per cent.

Stanley foresees the company’s EBITDA continuing to grow overall, though the $332 million projected for 2021 would represent a lower margin at 41.4 per cent compared to the 47.9 per cent margin reported in 2020. However, Stanley forecasts a rebound in 2022, with the projected $677 million in EBITDA representing a potential 48.3 per cent margin.

He also provides projections for operating cash flow for the first time before WC in 2021, forecasting the company to hit $171 million for a margin of 21 per cent before dropping to a projected $255 million and a margin of 18 per cent in 2022.

Accordingly, Stanley’s valuation metrics also show the company in a positive light, with the EV/Revenue multiple forecast to drop from the reported 10.1x in 2020 to a projected 4.5x in 2021 and 2.6x in 2022, while the EV/EBITDA multiple is forecast to drop from the reported 21.1x in 2020 to a projected 10.8x in 2021, then to a projected 5.3x in 2022.

Overall, Stanley believes the company is a strong investment within its particular industry, trading at 5.3x the Beacon Securities 2022 EBITDA forecast, representing a 49 per cent discount compared to the 10.4x average amongst its fellow US operators.

“While a discount may have been warranted when this stock was less liquid, times have changed. As shown on page 3, VRNO’s liquidity (measured as the average value traded over the last 30 days) is now comparable to that of the largest MSOs, though it continues to trade at a significant discount to those peers based on EV/2022E consensus EBITDA multiples. Today’s news reinforces our view that VRNO is overdue for a significant rerating,” Stanley wrote.

With the next set of quarterly results expected on November 16, Stanley believes Verano’s new infusion of funding will only help its forward evolution.

“We view the additional commitment and the terms on the incremental funding as indicative of VRNO’s strong fundamentals and its compelling EBITDA/cash flow margin profile versus the peer group,” Stanley said.

Overall, Verano’s stock price has dropped by 55.8 per cent since it began trading on the Canadian Securities Exchange in February, consistently falling since its early high point of C$31.99/share on February 19 and bottoming out at C$12.99/share on October 4.