Trulieve Cannabis has an ‘Outperform’ rating with ATB Capital

ATB Capital Markets analyst Kenric Tyghe sees a bit of upcoming turbulence with Trulieve Cannabis (Trulieve Cannabis Stock Quote, Chart, News, Analysts, Financials CSE:TRUL), though he maintained an “Outperform” rating and $75/share target price for a projected return of 178 per cent in an update to clients on Friday.

Tyghe’s update on the vertically-integrated cannabis operator based in Quincy, Fla. includes revised estimates for Trulieve’s next two quarters, which Tyghe said present a better reflection of headwinds from key markets, as well as those specific to the company itself.

“While our revised estimates reflect a decrease in our sales growth estimates (on both pricing pressures and volume decreases in Florida), the larger driver behind our estimate revisions are changes to our margin assumptions,” Tyghe said.

“The factors driving our margin estimates lower include (but are not limited to) the following: (i) a material fair value of inventory step-up (in excess of what we would see in the normal course on acquisition) given what was essentially a Harvest inventory blowout ahead of the rebannering of stores, (ii) elevated promotional intensity in-quarter against a weakening consumer sentiment backdrop, (iii) cost pressures across the board which moved higher through the quarter, and (iv) a big step up in the intangibles amortization expense, on the mark-market of Harvest’s heavily organic (versus acquisition) weighted license portfolio,” Tyghe wrote.

Over the weekend, Trulieve followed up its Florida rebannering with the completed rebranding of its three Harvest locations in Maryland.

Since the release of Tyghe’s analysis, Trulieve has also launched a number of new products in Florida, including Momenta, the company’s everyday wellness line, the Sweet Talk edibles line, its Cultivar Collection of whole flower offerings on a regional basis, and a second batch of Live Diamonds by Muse, a product from Trulieve’s hydrocarbon extraction lab, which proved popular after the first batch of 500 units sold out in under 24 hours.

“It’s an exciting time for Florida’s medical cannabis patients as we continue to expand our offerings and introduce proprietary brands in our home state,” said Kim Rivers, CEO of Trulieve in the company’s February 7 press release. “Trulieve continues to focus on growing safe, quality cannabis and continually innovating to provide a wide variety of products for our medical patients in Florida.”

Headlining Tyghe’s financial revisions is a reduction in 2021 fourth quarter revenue from $343.9 million to $318.4 million, leading to a revised 2021 year-end projection of $951.5 million (previously $976.9 million), though it still implies year-over-year growth of 82.4 per cent.

Tyghe also softened his revenue projection for 2022, though he still projects the company to roll into 10 figures at a forecasted $1.49 billion (previously $1.65 billion) for implied year-over-year growth of 56.6 per cent. Meanwhile, Tyghe maintains his 2023 projection of $1.82 billion in revenue, implying 22.5 per cent year-over-year growth.

In terms of valuation, Tyghe sees the company’s EV/Sales multiple dropping from 8.1x from 2020 to a projected 4.4x in 2021, then to 2.8x in 2022.

On account of the material drag in the inventory step up, paired with more price-sensitive consumers, Tyghe has also reduced his gross profit expectations for Trulieve, lowering his fourth quarter estimate from $224.4 million and a margin of 65.2 per cent to a new target of $195.1 million and a 61.3 per cent margin. It also contributes to Tyghe lowering his overall 2021 projection from $658.1 million and a 67.4 per cent margin to $628.8 million and a 66.1 per cent margin.

Tyghe’s revisions also mean Trulieve likely has to wait a year for gross profit to clear a billion dollars, as he lowered his 2022 forecast from $1.08 billion and a 65.8 per cent margin to $960.2 million and a 64.5 per cent margin, though he maintains his 2023 forecast of $1.16 billion.

Tyghe’s adjusted EBITDA metrics follow a similar path on account of more pronounced than initially expected promotional and cost pressures. All told, Tyghe reduced Trulieve’s Q4 2021 projection from $123.7 million and a 36 per cent margin to $113.3 million and a 35.6 per cent margin, leading to a reduced 2021 annual figure of $397 million (previously $407.4 million), though the margin remains at 41.7 per cent.

Tyghe’s 2022 projections see adjusted EBITDA dropping from $623.7 million to $567.8 million, though the margin actually increases in the new analysis to 38.1 per cent from 37.8 per cent, with Tyghe maintaining an estimate of $667.4 million and a 36.7 per cent margin in place for 2023.

Looking at valuation, Tyghe’s EV/EBITDA multiple forecast drops from 16.7x in 2020 to a projected 10.7x in 2021, then to a projected 7.5x in 2022.

With the rest of the downtrodden cannabis market, Trulieve’s stock price has tumbled by 55.5 per cent over the last 12 months, including a 12.9 per cent drop since the start of 2022. Trulieve has dropped off consistently since hitting its 52-week high of $65.60/share on March 16, eventually dropping to a 52-week low of $23.75/share on January 28.