4Front Ventures has target clipped by Haywood Capital

Expect modest growth with a better showing over the second half of 2022 from 4Front Ventures (4Front Ventures Stock Quote, Chart, News CSE:FFNT). That’s according to Haywood Capital Markets analyst Neal Gilmer’s who in a Thursday report to clients kept his “Buy” rating on the company but lowered his target price from $1.75/share to $1.50/share for a projected one-year return of 58 per cent.

Phoenix-based 4Front Ventures owns and manages licensed cannabis facilities in state-licensed markets in the United States, with a focus on the cultivation, processing, packaging, distribution and retail of cannabis in its THC Cannabis and CBD Wellness segments.

Gilmer’s updated analysis comes after the company reported its fourth quarter financial results, which came in slightly below expectations. The report was headlined by $28.5 million in net revenue (all report figures except share prices are in US dollars) for ten per cent sequential growth, though it was below the Haywood expectation of $30 million.

The margins went in opposite directions, as the adjusted EBITDA provided a beat at 41 per cent (Haywood’s projection was 22 per cent), while the adjusted gross margin was a miss at three per cent (Haywood’s projection was 53 per cent).

“Our fourth quarter results showed strong year-over-year growth, representing steady execution in the face of macro headwinds and reinforcing our thesis of consistent, low-cost production at scale,” said Leo Gontmakher, Chief Executive Officer of 4Front in the company’s March 30 press release. “Our team’s hard work in 2021 has laid the groundwork for continued strong growth to take root this year. We anticipate a very active first half of 2022, and we are more confident than ever that we are positioned with the tools, facilities, and teams in place to realize considerable growth and continue to build value for 4Front stakeholders for years to come.”

Ahead of its financial results release, 4Front announced a definitive agreement to acquire Island Cannabis Co., a leading California producer of pre-roll, flower and concentrate products, giving 4Front its first California brand while providing an opportunity to leverage its recently-approved cultivation facility in Commerce, located in southeast Los Angeles.

Island Cannabis Co. has operations across California, including cultivation with the Island products available in more than 150 stores across the state. Upon completion of the acquisition, which is expected to come in the second quarter of 2022, 4Front will have 170,000 square feet of manufacturing, 80,000 square feet of distribution and warehousing space, 250,000 square feet of mixed light cultivation capacity, along with advanced machine and automation technologies.

“Island is widely recognized for its high-quality, diverse line of pre-rolls, flower and infused products, and has been remarkably successful in building a loyal following in the extremely competitive California market,” Gontmakher said in a separate March 30 release. “Once integrated into 4Front’s Commerce facility, we can reduce production costs and scale volume of the Island Cannabis Co. brand. This will accelerate Island’s growth by making a respected brand even more attractive to California retailers and consumers.”

With the company’s fourth quarter results now public, Gilmer has made some revisions to his financial projections for 4Front.

“Our outlook for Q1/22 is modest growth given the macro dynamics in various market with some contribution from the acquisition in Massachusetts and continued ramp in California,” Gilmer said. “We are taking a more conservative growth profile, consistent with other companies in our coverage and as a result, have lowered our overall 2022 revenue and EBTIDA estimates. Given the 4Front’s potential growth opportunity and management commentary, we forecast strong H2 growth heading into 2023.”

Accordingly, Gilmer has lowered his overall revenue target for 2022 from $163.6 million to $143.2 million, which would still present a year-over-year increase of 36.9 per cent, while his 2023 estimate also dropped from $210.4 million to $199.8 million for a potential year-over-year increase of 39.5 per cent.

Meanwhile, Gilmer kept his adjusted EBITDA margin at 24 per cent for 2022, meaning a drop from $46.1 million to $39.9 million, while a drop in the 2023 margin from 26.8 per cent to 25 per cent means a forecasted drop from $63.9 million to $58.1 million.

Gilmer’s adjusted gross margin for 2022 remains at 54 per cent in his updated analysis, though the profit itself drops from $81.5 million to a projected $71.1 million. Meanwhile, his 2023 margin projection remains at 55 per cent, with a forecasted drop from $109.3 million to $103.5 million.

Overall, Gilmer believes 4Front presents an opportunity for investors to gain exposure in a U.S. multi-state operation.

“4Front is now positioned to capitalize on its Commerce facility to demonstrate growth in the California market, as illustrated by the announced acquisition of Island Cannabis,” Gilmer said. “Through 2022 we expect further brand acquisitions and/or white label partnerships in that market as well as growth in Massachusetts and Illinois.”

4Front’s stock price has fallen by 30.8 per cent over the last 12 months, and by 18.6 per cent since the start of 2022. After hitting a 52-week high of $1.69/share on April 22, the stock began gradually declining before making a sharper descent in January, eventually dropping to a 52-week low of $0.79/share on January 28.