US cannabis company StateHouse has target cut by ATB Capital

Disappointing quarterly results have ATB Capital Markets analyst Kenric Tyghe reevaluating his thesis on California-based cannabis company StateHouse Holdings (StateHouse Stock Quote, Charts, News, Analysts, Financials CSE:STHZ). In a company update on Sunday, Tyghe maintained a “Speculative Buy” rating on StateHouse while dropping his target price from C$1.25 to C$0.75 per share, which at the time of publication represented a projected one-year return of 78.6 per cent.

StateHouse, formerly Harborside Inc, is one of the largest vertically integrated cannabis companies in California, with retail, wholesale and branded wholesale channels and currently operating 13 dispensaries in California along with one in Oregon. Harborside was one of the first companies to establish legal medical operations in the state with a dispensary opened in 2006 in Oakland.

StateHouse reported second quarter 2022 financials on August 25, with total net revenues of $34.6 million, up 125 per cent year-over-year, and driven by recent acquisitions UL Holdings (Urbn Leaf) and LPF JV Corp (Loudpack), bought earlier this year. (All figures in US dollars except where noted otherwise.)

Calling it a landmark quarter for the company, CEO Ed Schmults said in a press release that profitability will be around the corner. 

“While California cannabis market conditions are currently challenging, particularly in wholesale, we are continuing to aggressively reduce costs and optimize operations, developing new consumer packaged cannabis products and expecting to generate material positive EBITDA in 2023,” Schmults wrote.

The company officially changed its name to StateHouse as of July 25, 2022, after a decision to forego for the time being a six-for-one, shareholder-approved share consolidation. Management said the new moniker better reflected the company’s new direction and image as a quality-focused premier California cannabis brand.

“This is an important milestone for the Company, which was formed through the business combination of four pioneering California companies,” said Schmults in a July 14 press release announcing the name change. “As we look to the future, the Name Change to StateHouse reflects our shared journey from activism and advocacy, to the establishment of an enterprise with high standards of quality, consistency and reliability.”

Reviewing the quarter, Tyghe said the $34.6 million Q2 topline missed expectations at $48.9 million for the consensus estimate and $47.8 million from ATB Capital. The analyst said the miss was driven by lower-than-expected average dispensary sales, pricing pressure and share losses in the wholesale market. Adjusted EBITDA was negative $4.8 million compared to the consensus call for positive $2.8 million.

“Despite a full quarter contribution from Urbn Leaf (and a partial quarter from Loudpack), StateHouse reported what we believe were very disappointing Q2/22 results on what (relative to pro-forma combined revenues) were relatively undemanding expectations that factored in market (and macro) headwinds but not the market share losses of key brands,” Tyghe wrote. 

“While the miss is material in absolute terms, it is even more material in the context of pro-forma (for the StateHouse entity) quarterly revenues of approximately $55.1million in 2021,” Tyghe said. “While the California market is markedly more challenging than a year ago, the performance in-quarter also highlighted market share losses of key brands.”

Tyghe said the quarter saw a shift in revenue composition following the Loudpack acquisition, with the combined company moving more flower production at its Salinas facility to support owned-brand and white label products. Manufacturing now represents about 43 per cent of total revenues compared to about 23 per cent for the Q1 2022, with about 53 per cent of flower produced at Salinas over the quarter used in the company’s owned brands versus about 21 per cent in the first quarter.

“This shift in strategy (dovetailing with continued pricing pressure in wholesale inter alia) resulted in a sequential wholesale revenue decrease of 23.6 per cent (3.6 per cent of total revenue versus 9.5 per cent in the prior quarter). The Company continues to target owned-brand penetration of 40.0 per cent at retail,” Tyghe said.

In other comments, Tyghe said the market conditions in California represent an uphill struggle where things have stabilized but not turned to growth. He said the results of StateHouse’s agreement with the IRS on Harborside’s legacy 280E obligations (which will see StateHouse pay about $5.8 million in federal taxes out of approximately $22.1 million owed, is a “materially better-than-feared” result.

Looking ahead, Tyghe is now expecting the company’s revenue to go from $60.3 million in 2021 to $131.9 million in 2022 and then to $174.3 million in 2023. On adjusted EBITDA, Tyghe is calling for 2021’s $0.8 million to drop to negative $6.2 million in 2022 before rising again to positive $19.9 million in 2023.

“While we are encouraged by the total expected annualized cost reductions and planned non-core divestitures, we believe that share losses will be challenging to recoup given current market dynamics,” Tyghe wrote.

“We have cut our 2022 revenue estimate to $131.9 million from $177.3 million to reflect these dynamics and our adjusted EBITDA estimate to negative $6.2 million from positive $6.7 million. We have also lowered our 2023 estimates,” he said.