Verano gets a target reduction from Beacon

The stock is a prime example of the sad state of affairs in the cannabis sector, with Verano Holdings (Verano Stock Quote, Charts, News, Analysts, Financials CSE:VRNO) having dropped steadily from C$30 in February, 2021, to now six bucks and change. Verano’s woes are shared across the pot stocks, which have all fallen big time over the past year and a half.

But investors will want to own a piece of Verano going forward, argued Beacon Securities analyst Russell Stanley in a recent update to clients, with cannabis markets expanding in the company’s key states and the stock currently trading at a marked discount to its peers. At the same time, Stanley reduced his target price on VRNO as a result of a lowered revenue forecast.

Chicago-based Verano, which has cannabis operations in 13 states in the US along with a number of consumer brands, announced last Friday that it had terminated its agreement to acquire Goodness Growth (Goodness Growth Stock Quote, Charts, News, Analysts, Financials CSE:GDNS), a $413-million deal originally announced in February. Goodness Growth’s operations include 18 dispensaries, cultivation and processing facilities, a research and development facility and a portfolio of brands. The company holds one of ten vertically-integrated grow and dispense licenses in the state of New York along with licenses and operations in a number of other states.

Verano said its action is based on GDNS’ breach of the agreement along with other termination events. Verano said it will be seeking $18 million in termination fees and expenses from Goodness Growth, while GDNS has separately announced that it will pursue legal action to seek damages from Verano, alleging that Verano has no legal basis to terminate the agreement and is in breach of contract. (All figures in US dollars except where noted otherwise.)

“We believe the decision to terminate this arrangement agreement was in the best interest of Verano and our shareholders,” said George Archos, Verano Founder and CEO, in a press release. “As we work through the termination process, we expect to provide additional commentary.”

In his update, Stanley did not comment on the event other than to say that prior to the announcement, Goodness Growth had been trading at an implied discount of just over three per cent and thus that the stock had almost fully reflected the value of the transaction. 

“We previously assumed that VRNO would close GDNS at year end, allowing it to make a full $80 million revenue contribution in F2023,” Stanley wrote in his October 14 report. “We have removed GDNS from our forecast.”

“Unrelated to [the termination news], we have also reduced our 2023 revenue forecasts for several of VRNO’s existing markets (notably Florida by $33 million, Pennsylvania by $29 million, and Illinois by $15 million) to better reflect their likely development,” he said.

In turn, those reductions have dropped Stanley’s revenue forecast for 2023 for Verano from $1.405 billion to $1.215 billion and lowered his adjusted EBITDA forecast for 2023 from $551 million to $457 million, hence the price target reduction. Closer to the present, Stanley’s full 2022 forecast has Verano generating $319 million in EBITDA on $907 million in revenue, which compares to 2021 EBITDA and revenue of $323 million and $738 million, respectively.

With the update, Stanley has reiterated a “Buy” rating on VRNO and reduced his target from C$34 to C$31, which at the time of publication represented a projected one-year return of 405 per cent.

Stanley commented on the US cannabis market, saying both New York and Minnesota look less appealing, at least over the near term. For Verano, the primary strategic value to its buying GDNS was its having one of only ten New York (population 19.5 million) licenses and being one of just two licensed operators in Minnesota (population 5.6 million). Delays in the adult-use rollout in New York are a factor, Stanley said.

“We note that sentiment towards New York has deteriorated, with multiple operators indicating their outlooks for NY had softened during their Q2 earnings calls in August. Adult-use legislation was enacted over 18 months ago, and the market has not yet opened,” he said. 

Stanley said reports are that the state’s Cannabis Control Board aims to release its adult-use regulations before the year’s end, potentially ushering in the market for the first quarter 2023 or early Q2. That would be further out from Governor Hochul’s recent claims that New York is on track to have 20 dispensaries open before the end of 2022.

“The state has reportedly received 900+ applications for an initial round of 150 retail licenses for social equity applicants. It remains unclear to us as to when incumbent medical operators such as GDNS will be allowed into the adult-use market, either at the wholesale or retail level,” Stanley wrote.

“In Minnesota, legislation that was passed in May and became effective in July, has effectively allowed the sale of hemp-based, THC-infused food and beverages, making the MN more competitive,” he said.

As for Verano, Stanley said the company has $350 million in senior secured term loans that mature during the April-August 2023 period, while during the company’s earnings call in August, management indicated that it was moving towards refinancing, a potential material catalyst for VRNO, Stanley said.

On valuation, Stanley said Verano is currently trading at 4.2x his 2023 adj EBITDA call, making it a 31 per cent discount to the 6.1x average of its CSE-listed US operating peers. On the technical picture, Stanley said the stock is approaching a test of its all-time lows, which could offer support.