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US cannabis name Verano is a Buy, says Beacon

The cannabis sector has had some jump to it this week, and that includes US multi-state operator Verano Holdings (Verano Stock Quote, Charts, News, Analysts, Financials CSE:VRNO), which remains at a loss of about 50 per cent for the past 12 months. But Beacon Securities analyst Russell Stanley is a true believer in the sector and in Chicago-headquartered Verano, which has been opening dispensaries across the United States at a fast pace of late. In a client update on Wednesday, Stanley reiterated a “Buy” rating and C$34.00 target price on VRNO, which at the time of publication represented a projected one-year return of 458 per cent.

News broke on Thursday that US President Joe Biden would be pardoning US citizens convicted in the past of simple possession of marijuana, a move which was hailed by the cannabis industry as a step in the direction toward decriminalizing cannabis at the federal level. Stocks shot up in response, with the market sensing a shift in tone, potentially leading to removing marijuana’s current classification as a Schedule 1 narcotic in the US and helping to bring federal laws more in line with many US states where cannabis has already been either legalized for recreational or medical use or decriminalized. 

Verano, which has a current market capitalization of C$2.5 billion, saw its share price spike almost 29 per cent on Thursday, although some of those gains have been clawed back in Friday’s trading. VRNO remains at a steep loss over the longer-term, however, just as has been the case across the cannabis space. The stock began trading on the Canadian Securities Exchange in February, 2021, starting out at C$30, but that was precisely the time that the market began souring on pot stocks, a trend which continued more or less unabated until this week’s news. 

Verano had at last count 119 dispensaries open across the US, with active operations in 14 states, including 14 production facilities and a number of retail brands such as Zen Leaf and MÜV. The company announced on Friday two new store openings in Florida, a key state with a population of 21.5 million. 

“We are incredibly grateful for our team who faced unique challenges in the wake of Hurricane Ian, and did everything possible to maintain access to medicine for our patients while also prioritizing their own health and safety,” said John Tipton, President of Verano, in a press release. 

“As the healing and recovery process continues across Florida, we are grateful to open dispensaries in Volusia County, and our first MÜV dispensary in Panama City Beach, to provide patients with additional convenient locations to access their needed medicine,” Tipton said.

Looking at the latest state-provided data on Florida sales volumes, Stanley said third quarter flower sales grew by three per cent quarter-on-quarter, while oil-based product sales were flat. As for Verano, Stanley said its flower sales also improved by three per cent compared with the second quarter, while its oil-based product sales dropped one per cent. The company maintained its ranking as the third-largest flower seller by volume with an eight per cent share of the market and fourth-largest oil-based products seller with a ten per cent share.

“We understand that VRNO has generally held firm on pricing versus some peers that continue to price aggressively. We had previously assumed eight per cent q/q revenue growth for Q3, but we now assume revenue is flat. We note that VRNO added 12 dispensaries during Q3, exiting with 61, which should support more meaningful revenue improvement in Q4. While Hurricane Ian necessitated many temporary store closures by a number of operators, we understand that VRNO’s cultivation/manufacturing operations were unaffected,” Stanley wrote.

Taking into consideration the stalling Florida numbers as well as more moderate growth expectations on the whole for the US cannabis industry, Stanley has trimmed his third quarter estimates on Verano, calling for revenue of $238 million (previously $248 million) and adjusted EBITDA of $76 million (previously $80 million). Accordingly, the analyst has also pared back his full-year 2022 forecast, now calling for revenue and adjusted EBITDA of $928 million and $328 million, respectively. His 2023 estimate is for revenue and adjusted EBITDA of $1.405 billion and $551 million, respectively. Stanley said the appreciation of the US dollar since his last update offsets the trimmed forecast to leave him with a maintained target of C$34 per share. (All figures in US dollars except where noted otherwise.)

“VRNO continues to rank highly in our 28-company tracking group, ranking 5th with an adjusted EBITDA margin of 34 per cent, while its operating cash flow margin (after working capital) of 4% ranked 6th overall. With Q2 featuring seasonally heavy tax payments, we expect cash flow margin improvement in H2. Given its strong margin track record, we have high confidence that the company will refinance its debt at attractive terms by cannabis company standards,” Stanley wrote.

On a comps basis, Stanley estimates Verano to be currently trading at a 34 per cent discount to its peer group average, with VRNO at 3.8x his 2023 EV/adjusted EBITDA forecast compared to 5.8x for the peer group. 

“The C$6/sh level continues to provide reliable technical support. The stock has probed/penetrated that level in each of the last several days before closing the day above it,” Stanley said.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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