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Green Thumb is a Buy in US Cannabis, says Beacon

It’s a tough time to be a fan of cannabis stocks, but Beacon Securities analyst Russell Stanley is liking what he sees from US-focused Green Thumb Industries (Green Thumb Industries Stock Quote, Charts, News, Analysts, Financials CSE:GTII). Stanley delivered an update to clients on Green Thumb on Tuesday ahead of the company’s second quarter financial report.

Chicago-based Green Thumb is a multi-state operator in the US with operations across 15 states, including 17 manufacturing facilities, 77 retail locations and employing over 4,000 people. Like the rest of the cannabis space Green Thumb has seen its share price drop considerably over the past year-and-a-half, as the market soured on cannabis both north and south of the border. In the case of GTII, the stock went from an early 2021 high of around C$48 per share to as low as $10 and change this past month. Shares have climbed slightly in more recent trading and the stock is up around $12.

But Stanley sees lots to be positive about going forward with Green Thumb, starting with the company’s enviable cash flow, an important marker for companies in the still-developing US cannabis industry.

“GTII is consistently one of the top operating cash flow margin producers in the space,” said Stanley. 

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Stanley said the second quarter results could be a little constrained, however, due to factors such as seasonally heavy tax payments and their impact on working capital requirements. For the Q2, he said he’s expecting operating cash flow of $41 million before working capital from Green Thumb for an operating cash flow margin of 16 per cent, which would be down from the first quarter’s 18 per cent. Cash from operations is expected to come in at $6 million after working capital. (All figures in US dollars except where noted otherwise.)

“We expect significant CFO improvement in H2 as working capital requirements normalize. For F2022, we expect GTII to produce operating cash flow of $184 million before working capital, and $151 million after working capital, for OCF/CFO margins of 18/15 per cent,” Stanley wrote.

On the top and bottom numbers, Stanley is calling for Q2 net revenue and adjusted EBITDA of $246 million and $68 million, respectively, compared to the consensus call of $249 million and $73 million, respectively. In its Q1 conference call, Green Thumb management had called for Q2 revenue to be flat against the Q1’s $243 million. 

Looking more long term, Stanley is forecasting GTII to deliver full 2022 revenue and EBITDA of $1,034 million and $300 million, respectively, and full 2023 revenue and EBITDA of $1,338 million and $468 million, respectively.

On valuation, the analyst is putting GTII’s EV/Net Revenue at 2.3x for 2023 compared to 2.6x for 2021 and moving to a multiple of 1.8x for 2023. On EV/Adjusted EBITDA, Stanley is predicting a move from 7.6x in 2021 to 7.8x in 2022 to 5.0x in 2023.

Stanley said Green Thumb is currently trading at 5.0x his 2023 adjusted EBITDA forecast, which represents a 12 per cent discount to the 5.7x average among CSE-listed US operators.

“We continue to believe GTII deserves a premium valuation given its strong margin/cash flow track record, and therefore believe the stock is very attractively priced at current levels,” Stanley wrote.

With the update, Stanley reiterated his “Buy” rating on GTII and his C$40 target price, which at the time of publication represented a projected one-year return of 240 per cent.

Green Thumb Industries will report its second quarter financials on Wednesday after the market close.

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