Ayr Wellness is a Top Pick for the Q1 2022, Echelon Capital says

There’s tons of upside to catalyst-rich US cannabis company Ayr Wellness (Ayr Wellness Stock Quote, Charts, News, Analysts, Financials CSE:AYR-A), according to Echelon Capital Markets analyst Andrew Semple. In an update to clients on Friday, Semple nominated Ayr as one of his Top Picks for the Q1 2022, marking the seventh consecutive quarter Echelon has so nominated Ayr, which has delivered a 58 per cent return over the past 24 months.

Ayr Wellness, with a current market cap of $1.3 billion, is a vertically integrated cannabis company with operations in Nevada, Massachusetts, Pennsylvania, Florida, Arizona and Ohio. The stock had a good run in 2020 but has tailed off over 2021 with the rest of the cannabis sector. 

In particular, Semple noted that Ayr was down about 44 per cent over the fourth quarter 2021, which is significantly lower than the sector average loss of 20.7 for its peer group in large and mid-cap US cannabis stocks. But the analyst sees little cause for the outsized drop-off, saying much of Ayr’s Q4 decrease came after the company posted third quarter results which were fine by Semple’s account.

“Q321 results were in line with our estimates, and although 2022 EBITDA guidance was moderated, we attributed >90 per cent of the cause of estimate changes to timing factors (M&A, facilities coming online) and management’s decision to build inventory ahead of adult-use sales commencing in key markets (NJ, MA), which do not impact the fundamental earnings power of Ayr’s business,” Semple said.

“We do not believe the weakness over the quarter is deserved and view the current price as an opportunity to build or expand a position ahead of the expected 2022 earnings ramp up. We emphasize that our price target assumes no change in federal cannabis regulation,” he wrote.

Commenting on Ayr Wellness’ recent events, Semple said the announcement on November 22 of a definitive agreement to acquire Dispensary 33 and its two Chicago dispensaries bodes well for the company’s growth in Illinois, a state which the analyst views as one of the most attractive adult-use states. 

On New Jersey, which Semple expects to start its adult-use sales in the second quarter of 2022, the analyst said, “Ayr is in an optimal position to benefit from elevated wholesale prices in New Jersey as product from its expanded cultivation facility comes online in Q222. We expect New Jersey revenue to reach ~$72M in 2022, and the state will be a significant contributor to overall gross margin expansion.”

Finally, Semple commented on Ayr’s recent debt financing of about $150 million, which he says will leave the company fully funded for organic growth and future M&A, with Ayr looking to open 28 new dispensaries in 2022 while doubling its cultivation and production footprint and actively pursuing acquisition opportunities in Illinois, Ohio and into new limited-license markets. Semple said news of accretive acquisitions alongside margin expansion in key states should produce a narrowing of the current valuation gap between Ayr and its peers.

“Ayr’s recent underperformance has been a surprise, further contributing to its extremely compelling valuation, which we view as one of the most attractive in the cannabis sector,” Semple wrote. “It trades at 5.9x EV/2022E EBITDA based on our estimates compared to an average of 9.5x EV/2022E EBITDA multiple for the large cap US cannabis peer group (ex. Ayr).”

“We do not see convincing reasons for the Company to trade at such a steep discount. Ayr has closed its most significant announced M&A transactions, continues to deliver solid financial results, and is adequately funded to execute on its organic and acquisitive growth plans,” he said.

By the numbers, Semple is calling for Ayr to deliver full 2021 revenue and adjusted EBITDA of $358.9 million and $99.2 million, respectively, and 2022 revenue and EBITDA of $718.6 million and $266.7 million, respectively. (All figures in US dollars except for where noted otherwise.)

With the update, Semple has reiterated his “Buy” rating and C$75.00 target price, which at the time of publication represented a projected one-year return of 299 per cent.

“Despite recent share price weakness, we continue to view our target price as conservatively positioned since: (1) we do not model Ayr investing any excess cash (including into M&A), (2) there is upside potential to our forecasts and (3) the valuation parameters used in our DCF model remain conservative. We note that applying a 25.0x terminal year FCF multiple would result in a DCF valuation of C$80.67/share all else equal,” Semple said.

Ayr Wellness announced on December 31 the opening of a new dispensary in Bryn Mawr, Pennsylvania, marking the company’s eighth store in the state.

“The Pennsylvania medical marijuana market continues to show excellent growth and we are excited to be opening our eighth affiliated dispensary in the Commonwealth. We consistently strive to deliver the highest quality product at an accessible price and look forward to bringing more of our branded products to the Pennsylvania patients in 2022,” said Ayr Wellness founder and chairman Jonathan Sandelman in a press release.