4Front Ventures has a 186 per cent upside, says Haywood

Disappointing quarterly results have arrived from US cannabis name 4Front Ventures (4Front Ventures Stock Quote, Charts, News, Analysts, Financials CSE:FFNT), according to Haywood Capital Markets analyst Neal Gilmer, who in a Friday note to clients retained a “Buy” rating on the stock, saying investors can expect better from the company as we move through 2023 and into 2024.

Phoenix, Arizona-headquartered 4Front, which has operations in California, Illinois, Massachusetts, Michigan and Washington, announced its fourth quarter and full 2022 financials on Thursday. The company posted net (GAAP) revenue of $31.6 million, up 11 per cent year-over-year but down 2.6 per cent sequentially. 4Front ended the quarter and year with $15.2 million in cash. (All figures in US dollars except where noted otherwise.)

“We continue to make appropriate moves to tighten our cost structure, which allows us to leave the month of March generating positive cash flow from operations,” said CEO Leo Gontmakher in a press release. “While we continue to navigate this incredibly challenging industry and economic backdrop, we remain focused on generating free cash flow, growing our topline, prudently managing operating costs to maximize shareholder value, and providing high-quality cannabis products to our customers.”

Looking at 4Front’s Q4, Gilmer said the $31.6 million in net (GAAP) revenue was below his estimate at $33.5 million, while adjusted EBITDA of $0.2 million was well under his forecast at $10.0 million. On margins, Gilmer noted that 4Front ended up with adjusted gross margin for the 2022 year of 27.1 per cent compared to 40.9 per cent in 2021, but he said management is expecting a return to margins above 40 per cent in the coming quarters.

“While the quarter was disappointing, management provided commentary on the call that suggests stronger results in the periods ahead with step-up growth expected late in 2023 and into 2024,” Gilmer wrote.

Gilmer relayed that during the quarterly conference call management said all of its markets except for California are delivering positive adjusted EBITDA and generating cash flow from operations. The analyst said he will update his estimates on 4Front once the full financials and MD&A are filed.

“4Front is now positioned to realize the investment in Illinois once the facility comes online later this year to drive notable growth in that state,” Gilmer said. “Management has demonstrated solid progress increasing market share in Massachusetts while it awaits for improvement in California.”

With his maintained “Buy” rating, Gilmer also kept his target price at C$0.70 per share, representing at press time a projected one-year return of 186 per cent.