Verano is still a Buy, says Haywood

Seasonal softness is expected for the current first quarter but there’s a clear growth runway in front of US cannabis name Verano (Verano Holdings Stock Quote, Charts, News, Analysts, Financials CSE:VRNO), according to Haywood Capital Markets analyst Neal Gilmer, who maintained a “Buy” rating on the stock in a Thursday report.

Active in 13 states across the US and 126 retail locations, Verano is a vertically-integrated cannabis player with 14 production facilities and a stable of brands, including Verano, MÜV and Encore. The company reported its fourth quarter and full 2022 results on Thursday, with Q4 revenue reaching $226 million, good for a year-over-year increase of seven per cent but a one per cent sequential decrease. Adjusted EBITDA for the quarter was $79 million compared to $82 million a year earlier. (All figures in US dollars except where noted otherwise.)

Verano founder, Chairman and CEO George Archos said the lack of movement on legalization at the federal level in the US has been a disappointment recently but state-level momentum has been encouraging. On the company’s growth, Archos noted the addition of over 30 dispensaries across its core markets.

“In 2023, we will consider selective opportunities to further expand our footprint, focus on free cash flow generation, and leverage our leading position in markets that are poised for adult use transition in the near future, including Maryland. I am proud of what we’ve accomplished in just two years since our IPO, and remain excited and confident in our plans to drive long-term, sustainable growth,” Archos wrote.

Gilmer said Verano’s Q4 revenue was in-line with his forecast but adjusted gross margin at 55.3 per cent was below his estimate at 62.0 per cent and down from 64.0 per cent for the prior quarter. Adjusted EBITDA at $78.7 million was above Gilmer’s estimate at $75.7 million and the consensus estimate at $76.9 million. 

Gilmer said on the conference call management spoke of seasonal softness in the current Q1 relative to the Q4 and continued margin pressure. He noted that Verano has joint venture agreements with six social equity dispensary owners in Connecticut that are expected to open stores in 2023 following the launch of adult-use in the state in January and he added that Verano’s position in Maryland continues to strengthen in advance of adult-use sales, which are anticipated to start in the second half of 2023.

“Verano’s footprint is well positioned to capitalize on new growth markets such as Connecticut, Maryland and New Jersey as well as Ohio, Pennsylvania and Florida which are most likely to be the next to pass adult-use. In addition to the growth opportunities, the company has a track record of impressive cost controls required that should enable it to generate meaningful cash flow in its more mature markets,” Gilmer wrote.

With the update, Gilmer retained a 12-month target of C$13.00, which at press time represented a projected return at the time of publication of 238 per cent.