Beacon Securities analyst Russell Stanley has cleared house on California cannabis stock StateHouse Holdings (StateHouse Holdings Stock Quote, Charts, News, Analysts, Financials CSD:STHZ), dropping his target price all the way from C$2.25 to C$0.25 per share in a Thursday report. But the analyst is sticking with a “Buy” rating on StateHouse, saying better operational efficiencies should deliver for the company in 2023.
One of the oldest cannabis companies in California, founded in 2006, San Diego-based StateHouse (previously Harborside) has 13 dispensaries in California and one in Oregon, with distribution facilities in San Jose and Los Angeles and integrated cultivation and production in Salinas and Greenfield, California.
The company released its third quarter 2022 results on November 22, with revenue coming in at $30.8 million, up 77 per cent year-over-year but down 11 per cent sequentially and based primarily on acquisitions earlier in the year along with two new store openings. Retail revenues were $16.5 million, while adjusted EBITDA was negative $5.5 million. (All figures in US dollars except where noted otherwise.)
“Undoubtedly, California’s cannabis industry has experienced several challenges over this past year which has created a unique opportunity for leaders to engage in meaningful discussions on how we can work together to move this industry into the future,” said CEO Ed Schmults in a press release.
“We believe a strong industry is driven by a diverse ecosystem of operators striving in unison for a robust and well-developed market that will drive innovation and excellence to deliver safe, high-quality products,” he said.
Stanley noted that management is expecting to generate materially positive adjusted EBITDA in 2023, with positive cash flow generation by the second half of the year. Raising the percentage of retail revenue based on house brands should help get them there, Stanley said, as the greater mix would improve gross margins.
“We expect improved cultivation costs/automation, labour planning, raw material procurement and fixed cost absorption (from white label production) to support additional OPEX reductions in F2023,” Stanley said.
“We are reducing our PT from C$2.25/sh to C$0.25/sh following a rightsizing of our revenue/EBITDA forecast based on the quarterly results and our outlook for California’s cannabis market,” he said. “While the PT change is significant, we note that our forecast improvement in adjusted EBITDA is almost entirely driven by margin expansion (in turn, primarily via OPEX reductions) rather than revenue growth.”
Stanley is now calling for StateHouse to deliver full 2022 revenue and adjusted EBITDA of $111 million and negative $16 million, respectively, and 2023 revenue and adjusted EBITDA of $120 million and positive $13 million, respectively. At the time of publication, Stanley’s new C$0.25 target price represented a projected one-year return of 67 per cent.