Ayr Wellness has a 451 per cent upside, says ATB Capital

US cannabis seems like a perennially fraught space for investors to be wading into these days, but there are good options for your investment dollars, says ATB Capital Markets, who launched coverage on Friday on Ayr Wellness (Ayr Wellness Stock Quote, Charts, News, Analysts, Financials CSE:AYR.A). The stock has been beaten down for considerable losses over the past year-and-a-half, but analyst Kenric S. Tyghe thinks there’s a lot of upside to come over the next 12 months.

Miami, Florida-headquartered Ayr Wellness is a vertically integrated multi-state operator (MSO) in the cannabis industry with a footprint across eight states in Massachusetts, Nevada, Pennsylvania, Florida, Arizona, New Jersey, Illinois and Ohio. Currently the sixth-largest cannabis company in the US based on 2023 consensus revenue estimates, Ayr started out as a public company through the special purpose acquisition company (SPAC) Cannabis Strategies Acquisition Corp in December, 2017, through five qualifying transactions for a total consideration of $270.4 million and involving retailers, wholesalers and manufacturers in Nevada and Massachusetts. From there, Ayr entered its third market in Pennsylvania through an acquisition in November, 2020, and followed up in February, 2021, by entering Florida through the $399.5 million acquisition of Liberty Health Sciences. Arizona, Ohio and New Jersey were also added over 2021, while Ayr entered Illinois in May of this year.

Tyghe said Ayr’s rapid-fire M&A expansion ultimately resulted in “a very noisy brand portfolio” on both the retail and product ends, with the company responding in late 2021 with a new corporate identity and retail and CPG brand portfolio, including the conversion of the company’s 65 dispensaries nationwide to the AYR retail banner, a move which started with its flagship store in Boston in early 2022. 

“The new strategic vision included a national retail concept and curated CPG brand portfolio designed to meet customer needs across every cannabis product category: flower, concentrates, edibles, beverages and vapes,” Tyghe wrote.

Ayr, which is set to report its third quarter 2022 financials on November 10, last reported in August, with the company’s 2022 Q2 featuring revenue up 21 per cent year-over-year to $110.1 million and adjusted EBITDA down 29 per cent to $19.6 million. (All figures in US dollars except where noted otherwise.)

For the upcoming Q3, Tyghe is expecting $114.3 million in revenue and $20.1 million in adjusted EBITDA. Longer-term, the analyst is calling for full 2022 revenue and EBITDA of $472.6 million and $86.5 million, respectively, 2023 revenue and EBITDA of $647.3 million and $135.6 million, respectively, and 2024 revenue and EBITDA of $726.7 million and $172.1 million, respectively.

“With the key pieces in place and the lion’s share of spend in the rearview mirror, we believe that [Ayr Wellness] is well positioned to leverage its footprint and brand portfolio to support solid growth and margin expansion through our forecast window,” Tyghe wrote.

“We believe Ayr’s growing footprint, underpinned by the growth of each market, as well as the expansion of footprints in Florida and entry into the high growth markets in Ohio and Illinois, support our expectations of a 32.1 per cent increase in 2022 revenues to $472.6 million,” he said.

As for the state of the cannabis industry in the US, Tyghe said, as always, it’s a question of potential movement at the federal level on legalization.

“The stalling out of legalization efforts continues to be not only the single largest overhang in the market, but also one that continues to limit investor appetite to see the wood for the trees, and price the space to reflect its very attractive (absolute and relative) growth profile,” Tyghe wrote.

“[A]bsent any near- to mid-term reform, the federal illegality of cannabis will continue to prevent operators from fully mirroring traditional CPG industries, as interstate commerce is blocked and marketing is strictly regulated and varies between states (as do the permitted form factors),” he said.

Nevertheless, Tyghe said development continues at the state-by-state level, and the transition of key markets to adult-use will support strong growth over upcoming years.

“The enormity of both the stakes (and prize) will drive intense (and increasing) competition between today’s leading MSOs and major CPG firms, as they battle for dominance of this large growth market,” he said.

Ayr Wellness saw its share price start heading south in February, 2021, when the cannabis space as a whole went into retreat. AYR went from a high of around C$45 per share to C$19.14 by the end of 2021. The slide has continued in 2022 and since the start of September the stock has been trading under the C$5.

With his initiation, Tyghe started AYR off with an “Outperform” rating and C$18.00 target price, which at press time represented a projected one-year return of 450.5 per cent. His target is based on a blended average of his discounted cash flow and EV/EBITDA valuation methodologies, where Tyghe’s EV/EBITDA applies a 10.0x target multiple to his 2023 EBITDA forecast of $135.6 million. 

“We believe our price target is well supported given Ayr’s solid brand portfolio and presence in catalyst heavy states,” Tyghe wrote.