Curaleaf gets target trimmed by Beacon Securities

The cannabis sector has been pummelled over the past year and a half and that includes US heavyweight Curaleaf Holdings (Curaleaf Stock Quote, Charts, News, Analysts, Financials CSE:CURA), whose stock has lost 43 per cent of its value year-to-date and 55 per cent over the past 12 months. But Beacon Securities analyst Russell Stanley argues that when the market’s interest in pot stocks finally returns, investors will want to own the leader in Curaleaf.

Stanley delivered an update to clients on the company on Wednesday where he maintained a “Buy” rating on the stock while lowering his target price from C$18.00 to C$14.00 per share, saying slowed growth prospects in key states Florida and New Jersey contributed to the target reduction.

Wakefield, Massachusetts-headquartered Curaleaf has operations in 21 states, including 144 dispensaries, 29 cultivation sites and over 6,000 employees, and the company also has a growing presence in the European market. 

On Curaleaf’s Florida business, Stanley said third quarter statewide sales data showed Curaleaf to have outperformed on oil-based product sales, which grew by 11 per cent in volume from the previous quarter, while flower sales were down five per cent in volume. 

“We had previously assumed eight per cent quarter-on-quarter growth in revenue, which we have since reversed to a five per cent decline. While this may prove conservative, we believe it prudent at this time. There were a number of store closings late in the week associated with Hurricane Ian, though we expect those sales to be recovered in Q4, with no meaningful impact on the cultivation/manufacturing supply chain expected,” Stanley wrote.

Stanley alluded to a delay in CURA’s New Jersey business as also a factor, where the company awaits Cannabis Regulatory Commission approval for its Bordentown adult-use store, with the next meeting of the CRC scheduled for October 20.

The overall impact of Stanley’s assessment is a lowered third quarter forecast for Curaleaf, taking his Q3 revenue and adjusted EBITDA calls from $346 million and $85 million, respectively, to $331 million and $71 million, respectively. Both Stanley’s top and bottom line estimates are below management’s guidance delivered in early August and the consensus forecast of revenue/EBITDA at $349 million and $90 million, respectively. (All figures in US dollars except where noted otherwise.)

With a longer view, Stanley has pulled back his full 2022 estimates, as well, and is calling for revenue and EBITDA of $1.355 billion and $323 million, respectively, and moving to 2023’s revenue and EBITDA of $1.793 billion and $539 million, respectively. The downward adjustments have brought about Stanley’s new target at C$14.00, which at the time of his report’s publication represented a projected one-year return of 111 per cent.

On valuation, Stanley has CURA pegged at EV/Revenue multiples of 3.7x for 2021, 3.3x for 2022 and 2.5x for 2023, while his EV/Adj. EBITDA goes from 15.0x in 2021 to 13.9x in 2022 to 8.3x in 2023.

On a comps basis, Stanley said CURA’s current 8.3x multiple of his 2023 EV/EBITDA forecast represents a 42 per cent premium to the 5.8x average among its peer group of Canadian Securities Exchange-listed US cannabis operators. But Stanley sees the premium as justified, as CURA is likely to lead the sector once sentiment returns to cannabis.

“As one of the largest operators and most liquid stocks in the comparable group, CURA deserves a meaningful premium to the peer group, and we expect this stock to be one of the first to benefit from renewed investor interest,” Stanley wrote.

As for potential upcoming catalysts, Stanley pointed to the CRC approval for Bordentown, the company’s third quarter results in early November and the closing of the Tryke acquisition, which, it turns out, Curaleaf also announced on Wednesday.

Curaleaf said it paid $181 million in cash and shares for Tryke, which has four retail dispensaries in Nevada and two in Arizona, a range of product brands and a portfolio of processing licenses with 30,000 sq ft of cultivation and capacity to expand to 80,000 sq ft over the next three years.

“We are pleased to welcome Tryke to the Curaleaf family as we expand our operations and bolster our competitive position in three key growth markets,” said Boris Jordan, Founder and Executive Chairman of Curaleaf, in a press release. “This strategic transaction expands our U.S. presence and yields meaningful benefits for all of our stakeholders. The acquisition is immediately accretive to our EBITDA margins and free cash flow generation.”