Buy Vext Science in US cannabis, says Echelon Capital

US cannabis name Vext Science (Vext Science Stock Quote, Charts, News, Analysts, Financials CSE:VEXT) is all cashed up and ready to roll, according to Echelon Capital Markets analyst Andrew Semple, who recently delivered an update to clients on the company, saying a new cash injection bodes well for the company’s organic and inorganic growth prospects.

Arizona-based Vext Science announced earlier this month a new $22.2 million credit facility with a California-based lender, with the money intended on going towards paying down debt and new acquisitions. The credit facility bears a floating interest rate which is currently at 7.5 per cent, well below rates typically seen in the US cannabis space, according to Semple. (All figures in US dollars except where noted otherwise.)

“This affirms our thesis that Vext’s positive operating cashflow profile, its ownership of real estate assets and prior relatively under-levered balance sheet would make it an attractive borrower to potential lenders,” Semple wrote in his July 8 report.

“We view this announcement positively for Vext shareholders because this will streamline the Company’s balance sheet, lower its cost of capital, and unlocks new growth possibilities,” he said.

Vext has cannabis production and retail facilities across several US states with a concentration on Arizona, which last year opened up its adult-use recreational market. The company sells THC and hemp products under its Vapen brand, with distribution across most of Arizona’s over 100 dispensaries.

On the credit facility, Vext CEO Eric Offenberger wrote in a press release, “This credit facility both lowers Vext’s cost of capital and gives us additional flexibility as we continue to execute our growth plans in Arizona and Ohio.”

“The next 12 months are expected to be a period of growth for Vext. With a solid balance sheet, ongoing free cash flow and access to relatively low cost, non-dilutive capital, we are in a position of strength to continue generating growth and profitability for shareholders,” Offenberger said.

Semple said he expects Vext to use about $8 million of the money immediately to pay existing debt, leaving about $14 million for potential M&A. On that front, Semple thinks the most obvious place to look for opportunities would be the consolidation of Vext’s joint venture in Ohio along with potentially acquiring a third retail license in Arizona. At the moment, Vext’s two dispensary and production facilities in the state are highly productive, according to Semple, while the company is also developing a third production facility at Eloy to expand production of its branded products. 

“Vext’s core business is in Arizona, one of the most attractive limited-license cannabis markets in America. The state implemented legal adult-use sales in January 2021 which should at least double the addressable market opportunity, with almost all upside accruing to the incumbent medical cannabis companies,” Semple wrote.

On its financials, Semple said Vext finished its first quarter 2022 with $3.8 million in cash on hand, with the quarter coming out modestly free cash flow negative. The analyst said he is not including any new ideas into his outlook but Semple believes that if Vext can deploy all $14 million of spare proceeds at an average EBITDA multiple of 4.0x, that could add $3.5 million in EBITDA to his forecast.

At the moment, Semple is calling for 2022 revenue and adjusted EBITDA of $43.6 million and $14.7 million, respectively, and for 2023 revenue and adjusted EBITDA of $49.3 million and $18.1 million, respectively.

Along with the rest of the cannabis space, Vext Science’s share price has dropped considerably over the past year and a half, going from around C$1.40 per share in early 2021 to now around the C$0.40-C$0.50 range. 

But Semple sees plenty of upside, reiterating in his update a “Speculative Buy” rating on the stock and a C$1.75 target price, which at the time of his report’s publication represented a projected one-year return of 257 per cent.

On the roughly $14 million Vext will have on hand for M&A and the company’s joint venture in Ohio, Semple wrote,

“Based on the value of precedent transactions and the likely capex investments made by Vext’s JV partner, we estimate this would likely require at least $40 million worth of consideration (potentially higher) to take full control of all three licenses (cultivation, processing, retail) that Vext is a party to in the state. This could be satisfied through a mix of the spare credit facility proceeds (~$14 million), seller notes, and stock.”

“However, it is likely some additional financing would be preferred prior to pursuing this option to provide financial flexibility upon closing. We currently estimate that the Ohio assets will generate ~$10 million of EBITDA collectively in 2023 (100 per cent ownership basis), possibly more if new dispensaries open faster than anticipated,” he said.