Verano is a Top Pick in cannabis, says Echelon

The stock has been in the dumps practically since it began trading on the Canadian Securities Exchange in early 2021, but investors should be looking ahead when it comes to US cannabis name Verano Holdings (Verano Holdings Stock Quote, Charts, News, Analysts, Financials CSE:VRNO), according to analyst Andrew Semple of Echelon Capital Markets. In a Thursday report to clients, Semple reaffirmed his Top Pick status on Verano while nonetheless trimming his target price.

Chicago-headquartered Verano, with a footprint across 14 states with its largest operations in Illinois, Florida, New Jersey, Maryland, Arizona and Pennsylvania, announced on Thursday it has entered into a credit agreement to refinance an existing $350 million credit facility, extending the maturity to a four-year term due October 30, 2026, along with securing flexibility for up to $270 million of additional debt in the future if needed. (All figures in US dollars except where noted otherwise.)

“Since Verano’s inception, we have taken a conservative approach to our balance sheet, including avoiding sale leasebacks, which has allowed us to leverage our real estate to bring down our blended cost of debt. This refinancing enables us to continue a selective approach to further strategic opportunities as we position our company for the future,” said Chairman, Founder and CEO George Archos in a press release.

Semple said he’s viewing the announcement as a positive as it solidifies Verano’s balance sheet from liquidity risk, extends the maturity of debt and allows the company to quickly tap capital for growth opportunities.

Semple reiterated a “Buy” rating on the stock while lowering his target from C$30.00 to C$25.00, based on his discounted cash flow valuation, saying he believes the higher-than-expected cost of debt capital just announced confirms that a tempering of his price target is appropriate.

“The new price target implies still healthy upside of 244 per cent from current levels, supporting our bullish view and Top Pick status,” Semple wrote. “Our DCF valuation moved modestly lower as the debt rate (and projected higher rates with future Federal Reserve interest rate hikes) was higher than we had modelled. We also tapered our Q422 and 2023 estimates modestly on evolving state cannabis sales data, particularly in Florida (Q322 estimates unchanged).”

Semple is forecasting Verano to deliver full 2022 revenue and adjusted EBITDA of $895.9 million and $319.7 million, respectively, and 2023 revenue and EBITDA of $1.123.9 billion and $431.9 million, respectively. 

Year-to-date, Verano’s share price is currently down about 53 per cent.