Vext Science has loads of upside, says Haywood

A strong quarterly performance and promising expansion efforts have Haywood Capital Markets analyst Neal Gilmer staying the course on US cannabis play Vext Science (Vext Science Stock Quote, Charts, News, Analysts, Financials CSE:VEXT). Gilmer provided an update to clients on Tuesday where he reiterated his “Buy” rating and C$1.50 target price on VEXT, saying the company could become an attractive acquisition target for cannabis multi-state operators.

Vext Science has vertically integrated operations in the state of Arizona with THC and hemp cannabinoid products and an in-house brand called Vapen along with THC beverage partnerships. The company is also establishing a presence in the Ohio medical market.

Vext released its first quarter 2022 financials on Monday, featuring revenue up 45 per cent year-over-year and up 16 sequentially to $10.8 million. Adjusted EBITDA for the period was $3.9 million compared to $3.1 million a year earlier and compared to $3.4 million for the Q4 2021. Cash flow from operations was $3.1 million. (All figures in US dollars except where noted otherwise.)

In his quarterly comments, CEO Eric Offenberger said 2022 will be an important period in Vext’s trajectory on the one hand through the expected approval of its first dispensary license in Ohio, conducted through a joint venture and likely to come this summer, and on the other hand by the company’s solid response to the currently challenging times in the cannabis space and in the broader economy. 

“Q1 marked an excellent start to the year for Vext, as our team continued to invest in targeted promotions, while maintaining solid gross margins,” Offenberger wrote in a press release. “An efficient operating model, product positioning and category focus will continue to be key success factors in 2022 as consumer-facing industries grapple with the impact of inflation on consumer discretionary income.”

“Vext’s operating model, which has been designed to maintain rigorous cost control, generated growth in Adjusted EBITDA of 15 per cent compared to Q4. Many brands are aimed at the high end of the market, and while there is room for those, our Vapen line of products, which consistently ranks as one of Arizona’s leading brand portfolios, is positioned to deliver high quality at a price that represents consistent value and delivers profitability to the Company,” he said.

A significant change for the company was its switch as of the start of the year from a not-for-profit operating and accounting framework to a for-profit framework in Arizona. Meanwhile, Vext also completed the expansion of its cultivation facility in Prescott Valley over the term, taking the company’s total indoor cultivation capacity to 24,000 sq ft. Vext finished the first quarter with a cash balance of $3.8 million and $12.5 million in debt.

The quarterly numbers were slightly better than expected, according to Gilmer, with the $10.8 million topline coming in ahead of his estimate at $10.2 million. Adjusted gross margins were 57 per cent while the $3.9 million in EBITDA was also a notch above Gilmer’s $3.6 million.

“While comparisons to prior periods becomes skewed due to the change in accounting framework, the company continued to report robust profitability margins and generate impressive cash flow from operations,” wrote Gilmer.

“While there was some noise from the change in operating model it was a solid quarter, and our outlook is relatively unchanged. We did tweak our estimates slightly lower to be more conservative in light of the broader macro uncertainty,” Gilmer said. “The ongoing expansions in Arizona will help optimize Vext’s operations in the state ahead of its next stage of growth, which is expected to occur once the company is able to roll up its investments in Ohio later this year.”

Gilmer noted that Vext introduced six new gummy flavours over the Q1 which have contributed positively to the company’s margins and customer retention in Arizona’s price-sensitive market. At the same time, the analyst said Vext will have to wait for new cultivation capacity to become available and thus will be buying flower from the wholesale market over the second quarter, with the result being a slight impact on margins over the short-term.

By the numbers, Gilmer is calling for Vext to generate 2022 revenue and EBITDA of $44.2 million and $15.6 million, respectively, and 2023 revenue and EBITDA of $60.1 million and $23.0 million, respectively. Gilmer judges VEXT to be currently trading at 2.4x his 2023 EBITDA estimates and 2.5x consensus estimates, which he sees as a discount to the company’s peer group average at 3.5x. Gilmer’s maintained target of C$1.50 is derived from using a 10x multiple on his 2023 EBITDA call, discounted by 15 per cent. At the time of publication, the C$1.50 target represented a projected one-year return of 257 per cent.

Gilmer said he likes Vext’s established presence in Arizona, the expansion into Ohio and its strong brand portfolio. On being a potential takeout target, Gilmer said, “In our view, Vext will become an attractive takeout candidate down the road, once Ohio is more established and consolidation is complete. At that time with what we expect to be profitable operations to two attractive markets, Vext is likely to garner attention from other multi-state operators.”