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Huge upside to Trulieve Cannabis, says Beacon

Growth looks to be slowing slightly for US cannabis company Trulileve Cannabis (Trulieve Cannabis Stock Quote, Charts, News, Analysts, Financials CSE:TRUL), says Beacon Securities analyst Russell Stanley, but the upside potential to the stock is still huge. In an update to clients on Wednesday, Stanley reiterated a “Buy” rating and C$62 per share target price on TRUL, which at the time of publication represented a projected one-year return of 402 per cent.

Florida-based multi-state operator Trulieve has been taken to the woodshed by investors over the past year-and-a-half, much like the rest of the cannabis space, which has seriously gone out of favour regarding both Canadian and US-based companies. Since March, 2021, when the stock stood at a high of C$66, things have gone downhill fast, taking TRUL to C$33 by the end of 2021 and then dropping as low as C$12 where the stock has been languishing in recent trading. 

The sector-wide pullback is likely giving investors a reason to pause if not flee in terror from pot stocks, but Stanley is staying decidedly upbeat. The analyst gave a hurricane-related update on Florida cannabis in light of Hurricane Ian, saying that many companies closed stores for a period of time and that the natural disaster will likely have a negative impact on sales over the immediate term. 

As for Trulieve, Stanley has accordingly trimmed his estimates for the third quarter, moving revenue from $321 million to $304 million and adjusted EBITDA from $108 million to $98 million. For the full 2022, he is now calling for revenue and EBITDA of $1.26 billion and $419 million, respectively, compared to his former forecast at $1.29 billion and $438 million, respectively. The revised 2022 figures are now at the low end of management’s previously-released guidance. (All figures in US dollars except where noted otherwise.)

“For F2023, we have reduced our F2023 adjusted EBITDA forecast from $592 million to $564 million, though the impact on our valuation was offset by the appreciation of the USD, and our price target is unchanged at C$62/sh,” Stanley wrote.

Trulieve has gone through some major expansion over the past year. Where the company was fairly Florida-centric in the past (where it remains the head-and-shoulders leader in the state on revenue and store count), moves have been made to broaden the company’s reach beyond the Sunshine State. By the end of 2020, for example, Trulieve had just entered its sixth state with a marijuana processing permit for West Virginia and altogether had 75 dispensaries, most of which were in Florida. But by its most recently reported quarter, the company’s Q2 2022, announced in August, Trulieve had operations in 11 states, over 180 dispensaries and with 32 per cent of its retail stores outside of Florida.

On the impact of Hurricane Ian on Trulieve, Stanley said he expected customer traffic and purchasing patterns to even out over the month of October and that TRUL’s cultivation and manufacturing operations in the state were unaffected.

“We believe multiple notable competitors have priced more aggressively than TRUL. We had previously expected TRUL’s Florida revenue to improve by four per cent quarter-on-quarter in Q3, and we now assume a six per cent q/q decline,” he wrote.

In other news, Stanley reported on a court order issued to Trulieve last week to halt production related to an ongoing battle over a license application in the state of Georgia. The analyst said the event marks merely a hiccup in TRUL’s expansion into Georgia (population 10.5 million), where it was recently awarded one of two Class 1 production licenses. Stanley said he expects the Georgia market to eventually expand into “a strong revenue/EBITDA contributor” for Trulieve.

The company is still growing, having recently opened two more dispensaries in Arizona for a state-wide count of 20 and two more in West Virginia for a state count of eight. There’s likely more to come from Trulieve, Stanley said.

“Based on our forecast and net of our CAPEX expectations ($183 million in F2022, $180 million in F2023), we estimate that TRUL has $190 million+ of cash available as dry powder to support M&A and/or accelerated CAPEX beyond our estimates,” he wrote.

Stanley said company-specific catalysts in TRUL’s case include further buildout updates, the company’s Q3 results in November and M&A activity. Stanley said TRUL’s technical picture is improving and that the stock has broken a downtrend that began in early September.

On valuation, the analyst has TRUL at an EV/Revenue multiple of 2.3x for 2021, going to 1.7x for 2022 and to 1.4x for 2023. On EV/adjusted EBITDA, Stanley has multiples of 5.6x for 2021, 5.1x for 2022 and 3.8x for 2023.

“TRUL trades at 3.8x our new F2023 adjusted EBITDA forecast, representing a 35 per cent discount to the 5.8x average amongst CSE-listed US operators,” Stanley wrote.

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