Columbia Care has a 135 per cent upside, says Beacon

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Beacon Securities analyst Russell Stanley is still advising shareholders of US cannabis name Columbia Care (Columbia Care Stock Quote, Charts, News, Analysts, Financials CSE:CCHW) to take accept the terms of the planned takeover by Cresco Labs (Cresco Labs Stock Quote, Charts, News, Analysts, Financials CSE:CL), but the analyst has lowered his target on CCHW in a Wednesday client report in step with his revised valuation for Cresco.

Columbia Care, which has interests in 18 jurisdictions in the US, including 99 dispensaries and 33 cultivation and manufacturing facilities, released its third quarter 2022 financials on November 14, showing revenue flat year-over-year at $132.7 million and adjusted EBITDA of $21.0 million compared to $24.8 million a year earlier. (All figures in US dollars except where noted otherwise.)

Calling it another challenging quarter, CEO Nicholas Vita said Columbia Care is seeing top and bottom line growth from its emerging markets in states such as New Jersey, Virginia and West Virginia. 

“We have made strategic operational decisions to prioritize quality production and efficiency, and redoubled efforts to manage costs as we face persistent macroeconomic headwinds that directly and materially impact the consumer wallet,” Although we continue to anticipate a more challenging operating environment over the next 12-18 months, we are encouraged by the ongoing resilience we’ve seen throughout our markets and by the enthusiasm of the cannabis community,” Vita said in a press release.

Looking at the results, Stanley said the $132.7 million topline was slightly below his forecast at $136 million and in-line with the consensus at $132 million, while adjusted EBITDA at $21.0 million significantly outperformed his and the Street’s forecasts at $14 million and $16 million, respectively.

“While adjusted gross margins were 250 bps below our forecast, and improved a modest 33 bps q/q, strong OPEX control produced adjusted EBITDA margins that were 554 bps stronger than expected, and up 653 bps q/q,” Stanley wrote.

Stanley noted that management has guided for flat-to-low single digit revenue growth for the fourth quarter with adjusted EBITDA margins in the mid-to-high teens compared to the 16 per cent in the Q3. 

With the update, Stanley reiterated his “Tender” rating on CCHW while dropping his target price from C$8.50 to C$4.75 per share, saying the revision is solely based on his new valuation for Cresco applied to the planned share exchange ratio. The acquisition by Cresco is now expected to be around late-first quarter 2023. At press time, the new target represented a projected one-year return of 135 per cent.

“CCHW is now trading at a 57 per cent discount to the implied C$4.75/sh value based on our Cresco price target of C$8.50/sh,” Stanley wrote. 

“Potential company-specific catalysts include buildout updates in New Jersey (opening of the third dispensary) and Virginia (seven more dispensaries to add), as well as progress towards completing the acquisition by Cresco, including asset divestitures in FL/OH/MD, and final closing expected around the end of Q1/23,” he said.