Vext Science is a Buy, says Beacon

Beacon Securities analyst Russell Stanley is staying bullish on US cannabis company Vext Science (Vext Science Stock Quote, Charts, News, Analysts, Financials CSE:VEXT), saying in a Monday update that the stock is currently trading at a marked discount to its peers.

Vext Science, an Arizona-based operation with cultivation, processing, retail and cannabis brands in the state, announced on Thursday an agreement to acquire the unowned interests in the cultivation and manufacturing facilities currently part of a joint venture. The move will create fully vertically integrated entity in the state of Ohio and comes with a $12.5 million purchase price, including $9 million in unsecured notes, $2 million in cash and $1.5 million in stock at a price of C$0.156 per share. (All figures are in US dollars except where noted otherwise.)

Vext concurrently announced an agreement to acquire a cannabis dispensary in Jackson, Ohio, which is 80 miles south of Columbus, for $6.9 million in cash. The result would be vertical integration in Ohio with two open stores.

“With an unwavering focus on delivering profitability and cash flow, Vext has the foundation to grow in this environment both organically and through highly selective, accretive M&A, with an eye to driving returns and shareholder value,” said Vext CEO Eric Offenberger in a press release.

Vext’s share price has fallen a long way over the past two years, along with much of the cannabis space, but Stanley sees plenty of upside from current levels, reiterating in his report a “Buy” rating and C$1.50 target price, which translated to a one-year return of 614 per cent at the time of publication.

“We have increased our 2023 revenue/adjusted EBITDA forecast from $41 million/$17 million to $67 million/$20 million, with the EBITDA impact moderated by the fact that our prior forecast assumed a minority interest contribution to EBITDA from the Ohio interests,” Stanley wrote. “We have also reflected the use of debt, cash and stock in our balance sheet forecasts, and the estimates in the sidebar are pro forma completion of these transactions.”

Stanley noted Vext’s concurrent announcement of a $10 million loan from an Ohio-based lender at a five-year treasury rate plus five per cent (or 8.6 per cent based on current rates). He said that while he expect Vext to keep an out out for additional retail assets in Ohio, where the cap per company is currently at five, he thinks management’s immediate focus will be on optimizing operations and cash flow to help de-lever the company.

Stanley estimated VEXT to be currently trading at 3.6x his 2023 EV/Adjusted EBITDA numbers, which represents a 50 per cent discount to the 7.2x average among its US operator peers.