Beacon Securities analyst Russell Stanley is still standing by VEXT Science (VEXT Science Stock Quote, Chart, News, Analysts, Financials CSE:VEXT), reiterating his “Buy” rating and C$2.75/share target price for a potential return of 337 per cent in an update to clients on Tuesday.
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, in particular, nearing vertical integration in Ohio.
Stanley’s latest analysis comes after VEXT announced agreements with the holders of its $4.4 million of secured nonconvertible debentures to extend the maturity date by one year to December 31, 2022, with all other terms remaining the same.
“We view the extension positively, as it demonstrates the lender’s confidence in VEXT and its creditworthiness,” Stanley said.
The debentures pay ten per cent and were originally part of a $5.5 million issue in December 2019. In November 2020, the lender (Sopica) redeemed $1.1 million of the debentures to fund its end of a non-brokered private placement at C$0.36/unit. Each unit included a share plus a full warrant convertible at C$0.45/share through November 2, 2023. Sopica’s funds own an aggregate of 6.8 million shares and 4.9 million warrants, representing just under seven per cent of the stock on a fully diluted, as-converted basis.
While Stanley noted that the company currently has the funds to pay off the debentures at the end of its third quarter reporting period, he said Sopica agreeing to extend the maturity date with no other changes is a strong endorsement for VEXT, with the company now having improved flexibility to support its growth plans in Arizona and Ohio.
VEXT’s most recent quarterly financials were released in November, headlined by $9.4 million in revenue (all report figures in US dollars, unless otherwise noted), representing 18.2 per cent year-over-year growth while remaining relatively flat on a sequential basis. The company’s gross margin dropped to 43.6 per cent from 45 per cent in the previous quarter, though it was an improvement on the 39.4 per cent margin reported in the same quarter of 2020.
Meanwhile, VEXT reported adjusted EBITDA of $3.6 million for a margin of 38 per cent, a sequential improvement on the 36.6 per cent reported in the previous quarter, as well as being a jump from the 32.5 per cent margin reported in the same quarter of 2020.
“While market-wide inflationary pressures will likely translate into some additional price sensitivity within certain consumer groups in the short-term, Vext’s vertically integrated position gives it a competitive advantage,” said Eric Offenberger, CEO of VEXT in the company’s November 18 press release. “We expect the next 12 months to be an important period for Vext as we continue to grow in Arizona, look for accretive opportunities to expand our footprint in the market and continue to solidify a vertical position in Ohio, all backed by a proven track record of operational excellence and profitability.”
Looking ahead, Stanley continues to project modest growth for the company, projecting 2021 revenue at $37 million before taking a jump to a projected $47 million in 2022, a potential year-over-year increase of 27 per cent. From there, Stanley projects another jump to $61 million in 2023, marking a year-year-over increase of 29.8 per cent.
Meanwhile, the company’s strong position on adjusted EBITDA is also reflected in Stanley’s estimates, projecting $14 million in adjusted EBITDA in 2021 for a margin of 37.8 per cent, growing to a projected $18 million and 38.3 per cent margin in 2022 before spiking to a projected $28 million and 45.9 per cent margin in 2023.
VEXT also continues to show positively from Stanley’s valuation perspective, projecting the company’s EV/Revenue multiple to drop from 2.5x in 2021 to 2x in 2022, then to 1.6x in 2023. The EV/EBITDA multiple projects a more significant drop, moving from 6.9x in 2021 to a projected 5.1x in 2022, then dropping again to a projected 3.4x in 2023.
Overall, with expansion plans still in the works, Stanley believes the company’s status as a first quartile cash flow producer makes it an attractive option.
“VEXT has consistently ranked amongst the leaders in EBITDA/cash flow margins, making it one of the most creditworthy companies in the space,” Stanley said. “We are therefore not surprised by the extension, and view the recent share price weakness as a particularly compelling buying opportunity.”
On a comparative basis, Stanley sees TEXT to be currently trading at 3.4 his 2023 EBITDA forecast which is a 70 per cent discount to the 11.2x average among CSE-listed US operators. Up ahead, Stanley said potential catalysts for VEXT include possible dispensary license wins in Ohio, progress on the cultivation and manufacturing buildout in Arizona and further M&A activity.
Overall, VEXT Science’s stock price has dropped by 31.3 per cent on the Canadian Securities Exchange for the year to date, peaking early in the year at C$1.54/share on February 10.