Green Thumb Industries keeps “Buy” rating at Echelon

Echelon Capital Markets analyst Andrew Semple is gravitating toward Green Thumb Industries (Green Thumb Industries Stock Quote, Chart, News CSE:GTII), maintaining a “Buy” rating and target price of C$55/share for a near doubling on its projected return at 97.8 per cent in an update to clients on Thursday.

Founded in 2014 and headquartered in Chicago, Green Thumb Industries owns and operates manufacturing facilities and retail where it produces and distributes cannabis consumer products under its own suite of brands, including Dogwalkers, Rythm, The Feel Collection and Beboe. Green Thumb curently has 17 manufacturing facilities, 73 open retail locations and operations across 15 US markets.

Semple’s updated analysis comes after Green Thumb announced it had closed on the acquisition of LeafLine Industries at an undisclosed consideration, marking its entry into the Minnesota medical marijuana market (the state has yet to legalize recreational, adult-use cannabis).

“Despite the small market size, we believe the market is attractive from a commercial perspective since this patient base is served by only two medical cannabis companies,” Semple said.

With the LeafLine acquisition now complete, Green Thumb now has access to a state with a population of approximately 5.7 million with approximately 29,000 active medical cannabis patients since sales began in 2015, according to the Minnesota Department of Health.

As part of the acquisition, Green Thumb brings a number of new assets into its portfolio, including a cultivation facility in Cottage Grove and five operating retail locations in Eagan, Hibbing, St. Cloud, St. Paul and Willmar, with the option to open up to three additional retail locations in the state.

“We are excited to enter the Minnesota medical market and broaden access to cannabis products for Minnesota patients,” said Green Thumb Founder and CEO Ben Kovler in the company’s December 30 press release. “We look forward to caring for LeafLine’s existing patients while ensuring a seamless transition. Looking ahead, we are ready to begin providing patients access to high-quality flower and edible products, both of which have been recently approved.”

Minnesota is the 15th state Green Thumb has entered, with its footprint covering half the population of the United States, as it operates locations in California, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Virginia.

Potential medical cannabis patients in Minnesota can be treated under 17 different conditions, with the most notable being chronic pain which was added to the list in the third quarter of 2020.

The Minnesota market is in line for significant product expansion in 2022, having approved the sale of smokeable flower beginning March 1, with edibles permitted beginning on August 1, adding variety to the limited product options of vapes, tinctures and topicals, which Semple believes will boost demand on account of meaningfully accelerated patient uptake in other medical states.

“Dried flower typically accounts for about 50 per cent of sales in mature medical markets where it is allowed, and edibles typically account for about 10 per cent of total sales, indicating that there should be meaningful room for the market to expand as these new formats are introduced and supply becomes more widely available,” Semple said.

With an expectation for LeafLine’s initial impact set for 2022, Semple’s financial projections are unchanged, as he projects revenue to jump from the reported $556.6 million in 2020 to a projected $897.2 million in 2021, a potential year-over-year increase of 61.2 per cent. 2022 sees Semple projecting the company to break the billion-dollar threshold, with the $1.21 billion projection marking a potential year-over-year increase of 34.8 per cent. (All figures in US dollars except where noted otherwise.)

Semple also expects the EBITDA margin to widen in that time period, jumping from the reported $179.6 million in 2020 (32.3 per cent margin) to a projected $316.1 million (35.2 per cent margin) in 2021, then spiking to a projected $466.8 million (38.6 per cent margin) in 2022; meanwhile, the gross margin is projected to remain relatively stable in the mid-50s.

From a valuation standpoint, Semple believes Green Thumb sticks out in relation to its peers, as he projects the EV/Revenue multiple to drop from 9.3x in 2020 to a projected 5.7x in 2021, then to a projected 4.3x in 2022; in each case, the Green Thumb projection represents a half-price offering compared to the peer group projections of 18.5x in 2020, 11.5x in 2021, and 8.5x in 2022.

The EV/EBITDA multiples follow a similar path, with Semple projecting Green Thumb’s multiple to drop from 28.7x in 2020 to 16.3x in 2021, then to 11x in 2022, acquitting itself well in comparison to the peer group averages of 57.5x in 2020, 32.7x in 2021, and 22.1x in 2022.

Overall, Semple is a believer in Green Thumb’s potential to make waves in Minnesota with its recent market entry.

“GTI has a solid track record of accretive acquisitions in limited license medical markets, including recent purchases in Virginia and Rhode Island,” Semple said. “We are encouraged by the attractive growth prospects in Minnesota as a still emerging medical cannabis market, and the prospects for strong financial performance due to the state’s very restrictive licensing.”

Green Thumb’s stock price has dropped by 13.7 per cent over the course of 2021, peaking at a 52-week high of C$48.71/share on February 10.