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Vext Science is a Buy in US cannabis, says Haywood


Haywood Capital Markets initiated coverage on Monday of US cannabis company Vext Science (Vext Science Stock Quote, Charts, News, Analysts, Financials CSE:VEXT), with analyst Neal Gilmer starting Vext off with a “Buy” rating and C$1.50 target price. Gilmer said he likes Vext Science’s profitable track record as the Arizona-based company looks to set up shop in the fast-growing Ohio market.

Vext is a cannabis THC and hemp cannabinoid products company which sells THC products including cartridges, concentrates and edibles under the Vapen brand and hemp-based products under Pure Touch Botanicals. The company is vertically integrated in Arizona and has cultivation and manufacturing facilities as well as two Herbal Wellness Centers in Phoenix, while Vext’s Vapen brand is also available in five other states. The company has agreements in place to acquire vertically integrated operations in Ohio. 

Like much of the cannabis sector over the past 12 months, Vext’s share price has sunk considerably, going from a high of about C$1.40 per share as of last February to now around C$0.60. But Gilmer said the company is likely to post strong revenue growth this year followed by another jump in 2023 as its acquires its Ohio assets which are currently operating under a joint venture.

“We believe Vext has established a solid track record in Arizona, growing its overall footprint and revenues profitably over the past few years. 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,” Gilmer wrote.

Gilmer said Vext’s business in the attractive market of Arizona has been profitable and well-established since 2016, while the company continues to expand operations in the state, which branched out from its medical-only market two years ago to become a recreational cannabis jurisdiction to complement its still-strong medical program.

A single-state operator at first, Vext has pushed out its Vapen brand to now also Ohio, Nevada, California, Oklahoma and Kentucky, while in Ohio the company currently has a 37.5 per cent ownership in a joint venture with Appalachian Pharms Processing for the manufacture, processing and sale of medical cannabis in Ohio. The company entered into an LOI with APP1803 to acquire an option for a dispensary license in Ohio. So far, Vext’s total Ohio investment stands at about $5.6 million as of Sept 30, 2021.

Gilmer said Ohio presents “real near-term potential” as one of the next states to legalize cannabis and establish an adult-use program, where the issue has gained bipartisan support, although legislation will likely face opposition from Governor Mike DeWine and House Speaker Robert Cupp. 

“A recreational market in Ohio presents a significant opportunity as the seventh-most populous state with 11.8 million people, trailing Illinois by only one million people,” Gilmer wrote. “Using Illinois as a reference point, its medical and adult-use programs did a record $173 million in sales for December 2021, implying an annual run-rate of $2.1 billion.”

“With Illinois expected to continue growing, it is reasonable to expect the Ohio market could grow to be a multi-billion-dollar opportunity at mature following adult-use legalization,” he said. “Its limited license structure and growth potential should make Ohio one of the more valuable state markets over the next several years.”

For its part, Vext last announced its quarterly financials in November where its Q3 2021 featured revenue of $9.4 million compared to $8.0 million a year earlier and adjusted EBITDA of $3.6 million (margin of 38.0 per cent) compared to $2.6 million a year earlier. (All figures in US dollars except where noted otherwise.)

“While market-wide inflationary pressures will likely translate into some additional price sensitivity within certain consumer groups in the short-term, Vext’s vertically integrated position gives it a competitive advantage,” said Vext CEO Eric Offenberger in a November 18 press release. “We expect the next 12 months to be an important period for Vext as we continue to grow in Arizona, look for accretive opportunities to expand our footprint in the market and continue to solidify a vertical position in Ohio, all backed by a proven track record of operational excellence and profitability.”

Looking ahead, Gilmer is calling for Vext to deliver full 2021 revenue and EBITDA of $37.4 million and $13.6 million, respectively, 2022 revenue and EBITDA of $45.8 million and $16.3 million, respectively, and 2023 revenue and EBITDA of $64.8 million and $26.0 million, respectively.

Gilmer said Vext looks good on comps, too, where he pegs the company to be trading at 2.8x 2023 EV/EBITDA versus its peer group average at 4.4x. 

“While a discount to the large multi-state operators is to be expected and warranted, we believe as management executes its strategy and evolves into Arizona and Ohio investors will need to recognize the value of those licenses and assets. We believe Vext will become a takeout candidate once it owns 100 per cent of its assets in the Ohio market,” Gilmer wrote.

As for catalysts for the stock, Gilmer pointed to the Q4 2021 financial results due later this month, the acquisition of the remaining stake in the Ohio operations along with potential partnerships and M&A and potential reform at both the state and/or federal levels. At press time, Gilmer’s C$1.50 target represented a projected one-year return of 146 per cent.

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