Columbia Care is our Top Pick, says Echelon

Echelon Capital Markets analyst Andrew Semple is confident in Columbia Care (Columbia Care Stock Quote, Chart, News, Analysts, Financials CSE:CCHW), maintaining a “Buy” rating and Top Pick Status for Q1 2022, along with a C$14/share target price for an implied one-year return of 293 per cent in an update to clients on Thursday.

New York-based multi-state operator Columbia Care cultivates, manufactures and provides cannabis-based health and wellness solutions and derivative products through its 99 dispensaries and 32 cultivation facilities. Columbia Care sells its products under the Cannabist, Seed & Strain, Triple Seven, gLeaf, Classix, Press, Amber, and Platinum Label Cannabidiol brands.

Semple’s report comes after Columbia Care completed a $185 million private placement (all report figures are in US dollars, unless otherwise noted) of 9.5 per cent senior first-lien secured notes, which will come due in February 2026.

“We view this non-dilutive debt financing positively, as the incremental capital offers financial flexibility for accelerating investments in core states or pursuing additional strategic acquisitions,” Semple said.

The new financing, which was issued at par, includes $153.3 million of incremental gross proceeds, as well as $31.8 million of existing debt rolled into the new senior notes at a much lower interest rate (350bps of savings) and longer maturity.

Columbia Care’s debt raise comes on the heels of its cannabis contemporaries in Trulieve ($425 million at eight per cent) and CuraLeaf Holdings ($475 million at eight per cent) executing raises of their own, while Verano Holdings exercised an accordion option on its existing credit facility for an additional $100 million at 8.5 per cent.

With the new financing, Semple estimates Columbia Care to have a pro forma cash balance of approximately $200 million, or roughly 18 per cent of its current partially diluted market capitalization, which should offer the company significant liquidity for accelerated capex and new mergers and acquisitions.

In particular, company management has identified an aim of investing in core markets, specifically referencing New York, Virginia, and New Jersey, where Columbia Care already has two medical dispensaries and a cultivation facility ahead of adult-use sales beginning in the second quarter of 2022.

The company has also begun first phase construction on its cultivation facility in Vineland, with the first production expected to hit the market in the second half of 2022.

“We expect the New Jersey market to face tight supply conditions upon its conversion to adult-use sales. As such, we believe New Jersey is an imminent priority for accelerating capex,” Semple said. “Continued aggressive capex spend in New Jersey should help Columbia Care build a strong first-mover position in that market, along with other vertically integrated medical licensees in that state.”

With emerging market data continuing to indicate slower sequential sales growth than previously anticipated, Semple has softened some of his financial projections for Columbia Care, lowering his revenue target for the fourth quarter of the 2021 fiscal year from $144.5 million to $137.4 million, below the consensus estimate of $144 million. As a result, Semple’s 2021 year-end revenue estimate dropped from $479.1 million to $471.9 million, though the revised figure still marks a potential year-over-year increase of 138.5 per cent.

Semple also softened all of his 2022 quarterly forecasts with the market data in mind, lowering his annual projection from $681.1 million to $655.7 million, suggesting a year-over-year increase of 38.9 per cent. However, he has slightly raised his 2023 projection from $825.8 million to $827.7 million for a suggested year-over-year increase of 26.2 per cent.

From a valuation perspective, Semple projects Columbia Care’s EV/Sales multiple to drop from 7.8x in 2020 to 3x in 2021, then to 2.1x in 2022, staying well ahead of the target figures of 10.4x in 2021 and 7.3x in 2022.

Semple also lowered his adjusted EBITDA projection for 2021 from $91.8 million to $89.1 million for an implied margin of 18.9 per cent, then lowered his 2022 projection from $187.7 million to $177.4 million for an implied margin of 27.1 per cent. Just like with revenue, Semple increased his adjusted EBITDA projection for 2023 from $270.1 million to $270.4 million, implying a margin of 32.7 per cent.

Semple introduces an EV/EBITDA multiple projection of 16.2x in 2021, then effectively halves it to 7.9x for 2022; both numbers come in ahead of the targets of 55.2x in 2021 and 26.9x in 2022.

With sales in New York and Virginia not yet factored into his estimates, Semple believes Columbia Care has even more upside as an investment, and that the recent debt raises are positive for the American cannabis industry as a whole.

“We view the capital raise and refinancing as further evidence that debt markets are increasingly receptive to the US cannabis industry despite federal prohibition and recent equity market headwinds,” Semple said. “The substantial improvement to debt markets for large-cap MSOs has significantly improved their financial flexibility, and will allow these operators to further pursue rollup M&A of privately held businesses at attractive valuations.”

Over the last 12 months, Columbia Care’s stock price has crumbled to a 61.3 per cent loss, though it’s only dropped 0.3 per cent since the start of 2022. The stock has rebounded slightly since hitting a 52-week low of C$3.37/share on January 28, but is a long way off the heights of its 52-week high of C$9.70/share from a year ago.