US cannabis name Vext Science keeps Buy rating from Haywood

Neal Gilmer from Haywood Capital Markets continues to believe in the viability of VEXT Science (VEXT Science Stock Quote, Chart, News, Analysts, Financials CSE:VEXT), maintaining a “Buy” rating and C$1.50/share target price for a one-year potential return of 159 per cent in an update to clients on Wednesday.

VEXT is a cannabis agricultural technology, services and property management company, working in the cultivation, extraction, manufacture and sale of THC and CBD cartridges, concentrates and edibles in the United States, along with retail dispensary activities.

Gilmer’s updated analysis comes after VEXT reported its fourth quarter and year-end financial results for 2021, which Gilmer noted to be in line with expectations. Company management also noted its shift to for-profit accounting beginning with its next reporting period, which Gilmer notes should show the true scale of VEXT’s current operations.

“While the transition is expected to increase the overall top-line, the bottom-line should stay relatively unchanged,” Gilmer said.

The company’s fourth quarter was headlined by $9.3 million in revenue (all report figures are in US dollars except where noted otherwise), marking a 45 per cent year-over-year increase while staying relatively in line with the Haywood projection of $9.5 million in revenue, though gross margins came in slightly below expectations at 42.5 per cent compared to the Haywood projection of 44 per cent.

Meanwhile, the company’s adjusted EBITDA came in at $3.4 million for a 36 per cent margin to stay relatively in line with the Haywood projection of $3.5 million, while Gilmer came away impressed with the company’s cash flow from operations, which was at $4.8 million for the quarter.  

Vext has been busy over the last little while, having recently completed its cultivation expansions at its facilities in Phoenix and Prescott Valley, AZ, to bring its indoor footprint to 24,000 square feet, with an additional 17,000 square feet of cultivation space in Eloy, approximately 65 miles southeast of Phoenix, still on track to be ready by the third quarter of 2022.

According to Gilmer, the company is also looking to expand its Phoenix operations by increasing its dispensary from 2,000 to 5,000 square feet at a capex cost of $1 million, while also looking to add 6,000 square feet of manufacturing space to its Phoenix facility at low cost.

Despite the expansions, Gilmer also noted that the company is not looking to become a bulk flower supplier in the state and will use the additional output to supply its own brands and retail stores, with the added space limiting Vext’s need to purchase from the wholesale market.

“We expect the next 12 months to be a period of further expansion for Vext,” said CEO Eric Offenberger in the company’s April 20 press release. “Specifically, during 2022, we are planning for prudent footprint expansions in the Arizona market across our wholly-owned cultivation, manufacturing and retail operations, with a keen eye toward ongoing profitability. We continue to build-out a vertical footprint in the Ohio market with our joint-venture partners, and will be in a position to apply for a license transfer for the dispensary we currently have under letter of intent in Columbus. Vext has significant financial flexibility entering 2022, with a solid balance sheet, fully funded expansion plans, and ongoing cash flow generation.”

Vext ended 2021 with $37.2 million in revenue for a year-over-year increase of 47.6 per cent, with Gilmer setting a $45.8 million forecast for 2022, suggesting a potential year-over-year increase of 23.1 per cent. Looking ahead to 2023, Gilmer forecasts revenue of $64.8 million for a potential year-over-year increase of 41.4 per cent.

From a valuation perspective, Gilmer projects a drop in the company’s EV/Revenue multiple from the reported 1.9x in 2021 to a projected 1.5x in 2022, then to a projected 1.1x in 2023.

Meanwhile, the company reported $13.4 million in adjusted EBITDA to wrap up 2021 for an implied margin of 36 per cent. Going forward, Gilmer forecasts adjusted EBITDA to grow to $16.3 million, though it comes with a slightly smaller implied margin of 35.6 per cent; for 2023, Gilmer expects the margin to widen to 40.1 per cent with adjusted EBITDA of $26 million.

In terms of valuation, Gilmer projects a drop in the EV/EBITDA multiple from the reported 5.3x in 2021 to a projected 4.3x in 2022, then dropping again to a projected 2.7x in 2023.

“We believe Vext has established a solid track record in Arizona, growing its overall footprint and revenue profitably over the past few years,” Gilmer said. “As the Company continues to execute in that market, while entering Ohio through its JV’s and we expect full ownership in that state, further value should be unlocked in our view.”

VEXT’s share value has dropped by 18 per cent since the start of 2022, enjoying a brief hike to C$0.74/share on February 16 before falling to C$0.50/share today, just above its 2022 low of C$0.49/share from January 28.