Trulieve Cannabis is more than a double, says Echelon

Echelon Capital Markets analyst Andrew Semple’s view of Trulieve Cannabis (Trulieve Cannabis Stock Quote, Chart, News, Analysts, Financials CSE:TRUL) has taken a slight hit; though he maintained his “Buy” rating, he dropped his target price from $60/share to $55/share for a projected return of 112.9 per cent in an update to clients on Thursday.

Headquartered in Florida, Trulieve Cannabis is a vertically-integrated cannabis operator engaging in the cultivation, manufacturing and retail of cannabis products in legal state markets in the US. Though the Florida market is the company’s revenue driver, Trulieve also has operations either ongoing or being built in California, Connecticut, Massachusetts, Pennsylvania and West Virginia.

Semple’s latest analysis comes after the company released its fourth quarter financial results, which Semple saw as being below the original estimates but in line with expectations given the state of the United States cannabis industry. The company also introduced financial guidance for the 2022 fiscal year.

“We view the majority of the delta to consensus is likely concentrated around H122, where management indicated that Q122 revenue, gross margin and adj. EBITDA are likely to be flat from Q421,” Semple said. “This commentary has been in line with the expectations set by MSOs reporting results earlier in March.”

Trulieve’s financial quarter was headlined by $305.3 million in revenue (all figures outside of share prices are in US dollars), which was a slight miss on Echelon’s $309.7 million target and the consensus expectation of $308.1 million, though it was still a 36 per cent sequential increase, with Semple attributing the jump to the October 1 closing of Harvest Health and Recreation, with Q4 being the first full reporting quarter under the Trulieve banner.

In terms of margins, price competition put the company’s adjusted gross margin at 59.1 per cent compared to the Echelon expectation of 61.3 per cent, while the $100.9 million in adjusted EBITDA (33 per cent margin) also missed compared to the $105.8 million projection from the consensus and the $106.1 million estimate from Echelon Capital.

“2021 was a phenomenal year for Trulieve, full of monumental achievements, punctuated by the completion of the Harvest acquisition,” said Kim Rivers, Trulieve CEO in the company’s March 30 press release. “Our team built upon our established track record of success, further expanding our distribution network through our hub strategy while setting the stage for continued growth. In 2022 we expect to deliver improved performance as our efforts to optimize assets and teams across our platform provide meaningful contributions to our results.”  

With fourth quarter financial results now in the books and updated management guidance in mind, Semple has revised his forward-looking financial projections. After finishing 2021 at $938.4 million in revenue (Semple’s previous estimate was $942.7 million), Semple still forecasts the company to jump into 10-figure revenue, albeit at a revised figure of $1.34 billion compared to the previous $1.49 billion estimate and below the consensus target of $1.36 billion, though the new number still represents a potential year-over-year increase of 42.8 per cent.

Semple also introduced projections for 2023, setting a revenue target of $1.61 billion for a potential year-over-year increase of 20.3 per cent, though the projection is below the consensus estimate of $1.69 billion. 

In terms of valuation, Semple sees the company’s EV/Sales multiple dipping from 4.4x in 2021 to a projected 3.1x in 2022, which comes in ahead of the target multiple of 6.3x.

Semple has also made adjustments to margin-related forecasts, having lowered his adjusted EBITDA target for 2022 from $565.5 million to $463 million (consensus estimate $497.9 million) for an implied margin of 34.5 per cent, while setting a $603.9 million estimate for 2023 (consensus projection $641.5 million) to produce an implied margin of 37.5 per cent.

From a valuation perspective, Semple sees Trulieve’s EV/EBITDA multiple dropping from the reported 10.9x in 2021 to a projected 8.9x in 2022, which comes in ahead of the target of 18.2x.

Meanwhile, Semple also lowered his adjusted gross margin target for 2022 from 61.9 per cent to 60.3 per cent compared to the consensus expectation of 62.4 per cent; Semple’s 2023 projection of 60.5 per cent also comes in behind the consensus estimate of 61.6 per cent. 

“We note that our estimates are modestly below the consensus for all forward periods,” Semple said. “We believe this reflects the conservatism of our model, including our achievable store opening targets, modest wholesale growth expectations in 2022, and moderated views on some US cannabis markets that have matured more quickly than anticipated. We look for Trulieve to continue to expand sales and EBITDA in each quarter ahead (albeit mostly flat in Q122).”

Trulieve’s stock price has tumbled to a 54.8 per cent loss in the last 12 months, and a 19.8 per cent drop since the start of 2022. The stock has gradually dropped since its 52-week high of $57.15/share from a year ago today, dipping to a 52-week low of $21.80/share on March 15.