Harborside is more than a four-bagger, says Beacon

Oakland-based cannabis company Harborside Inc (Harborside Stock Quote, Charts, News, Analysts, Financials CSE:HBOR) received a vote of confidence from Beacon Securities analyst Russell Stanley on Thursday. The analyst delivered an update to clients where he reiterated his “Buy” rating and C$3.00 target for the stock, which is up over 35 per cent in 2022 but still well off its highs set earlier last year.

Harborside is a vertically integrated cannabis company with four dispensaries in California and cultivation and manufacturing facilities in Salinas. The company announced on Wednesday that shareholders had overwhelmingly approved a number of motions including the issuing of shares to acquire Loudpack and Urbn Leaf, a move which would make the company one of the largest retailers and wholesalers in California. Shareholders also approved changing the company’s name to StateHouse Holdings, with a pending application to the Canadian Securities Exchange to have their ticker changed to STHZ.

“The shareholder approvals today represent important milestones on our path to complete these transformational transactions, which will create a new powerhouse in the California cannabis industry,” said Matthew Hawkins, Chairman of the Board and Interim CEO of Harborside, in a press release. “We believe StateHouse will be one of the largest publicly traded vertically integrated cannabis operators in the state of California, with a fully installed and operational platform to consolidate the state’s cannabis sector.”

Along with the acquisitions and name change, shareholders approved a new board of directors, a share consolidation (the ratio is yet to be determined but will be no greater than one-for-six) and amendments that will make it easier for holders of multiple voting shares to convert to subordinate voting shares. Harborside also recently completed an initial $45-million tranche of its $77-million debt financing, with the expected close of the remaining $32 million coming after the acquisitions are completed.

Stanley said he likes Harborside’s new moves and continues to see HBOR as a stock trading at a marked discount to its peers in the US cannabis sector.

“We view the developments positively as they set up completion of the acquisitions, establish a new board and set the stage for the stock to become more appealing to institutional investors,” Stanley wrote.

“The stock has had an impressive run over the last few weeks, but it still trades at just 4.8x our F2023 adjusted EBITDA forecast. This represents a 26 per cent discount to the 6.5x average at which CSE-listed US operators trade. Potential catalysts include the closing of the Urbn Leaf/Loudpack transactions, closing of the second debt tranche, a settlement of the outstanding tax liabilities, and the Q4 results (likely April),” Stanley wrote.

Stanley has modified his estimates on HBOR to reflect the proposed March 30 closing of both the Urbn Leaf and Loudpack acquisitions as compared to the analyst’s previous expected date of June 30. Stanley is now calling for Harborside to generate full 2021, 2022 and 2023 revenue of $63 million, $201 million and $280 million, respectively, and to report Adjusted EBITDA for 2021, 2022 and 2023 of $3 million, $18 million and $61 million, respectively. On valuations, Stanley is expecting the company’s EV/Net Revenue multiple to go from 4.7x in 2021 to 1.5x in 2022 to 1.1x in 2023, while the EV/Adjusted EBITDA multiple is forecasted to go from 88.8x in 2021 to 16.4x in 2022 to 4.8x in 2023. (All figures in US dollars except where noted otherwise.)

As for the California cannabis market, Stanley reported that data recently released from the Department of Tax and Fee Administration show that sales in the Golden State were up above $5.2 billion in 2021, representing a 17 per cent year-over-year increase from the $4.4 billion mark set in 2020.

In other Harborside news, the company has announced plans to acquire an additional 30 per cent stake in FGW Haight for $1.3 million in stock, pending approval from the City of San Francisco and with a close expected by the end of February. The move would take HBOR’s stake to 80 per cent, with the company having a right of first refusal on acquiring the remaining 20 per cent. 

“This dispensary in the historic and culturally-significant Haight-Ashbury district will enhance Harborside’s position as a leading cannabis retailer in California,” said Hawkins in a February 15 press release. “Our position in Northern California is already very strong and we expect to expand it significantly following the creation of StateHouse.”

Stanley said the combined operations under StateHouse will represent pro forma annualized revenue of $220 million and have a retail footprint totalling 15 locations under the Urbn Leaf banner upon rebranding, making it the second-largest retail footprint under a single banner in the state after Cookies.

“With HBOR shareholders having recently approved the acquisitions of Urbn Leaf and Loudpack, the post- closing company (to be renamed StateHouse Holdings) will be very well positioned for future revenue/EBITDA growth. We generally expect the company to focus future M&A on expanding the retail footprint, while the wholesale business will likely expand via organic growth,” Stanley wrote.

At press time, Stanley’s C$3.00 target on HBOR represented a projected one-year return of 317 per cent.