US cannabis name 4Front Ventures (4Front Ventures Stock Quote, Charts, News, Analysts, Financials CSE:FFNT) increased revenue in its latest quarter, but lower gross margins up ahead are cause for a target price revision, according to Haywood Capital Markets analyst Neal Gilmer, who delivered an update on Monday. Gilmer reiterated a “Buy” rating on the stock while dropping his target from C$0.70 to C$0.50 per share, saying 4Front should see notable growth in its Illinois business later this year.
Based in Phoenix, 4Front is a multi-state operator in the US currently with combined cultivation, processing and manufacturing operations across five states. The company announced its fourth quarter and full-year 2022 financials on Thursday, featuring GAAP revenue up 11 per cent year-over-year to $31.6 million and with full 2022 GAAP revenue up 13 per cent to $118.5 million. Adjusted EBITDA for the year was $27.7 million compared to $33.9 million in 2021, while the company had cash at the 2022 year end of $15.2 million. (All figures in US dollars except where noted otherwise.)
“Despite the challenging and unpredictable operating environment for cannabis in 2022, I could not be prouder of our team for remaining focused on controlling what we could control,” said CEO Leo Gontmakher in a press release. “We left the year with a stronger balance sheet, a highly experienced management team, and enhanced operating assets to drive significant shareholder value over the next 12 months.”
Gilmer said the Q4 $31.6 million topline was slightly below his estimate at $33.5 million and actually represented a 2.6 per cent sequential decline. Gilmer said management made a change in accounting treatment for its annual audited results such that the adjusted EBITDA figure for the fourth quarter ended up at $6.3 million, which compared to Gilmer’s estimate at $10.0 million.
The analyst noted that 4Front expanded its product portfolio in Massachusetts over the quarter, which helped increase revenue and market share in the state. Meanwhile, the company should be delivering a step-up in terms of growth in its Illinois business by late 2023 and into 2024, according to Gilmer, with the completion of construction at its 250,000 sq ft cultivation and production facility in Matteson, Illinois, by next month.
Gilmer said the change in accounting combined with overall pressures in the California market have prompted changes to his estimates, where he now calls for GAAP revenue to go from $118.6 million in 2022 to $134.3 million in 2023 and to $163.2 million in 2024. EBITDA is expected to go from $27.7 million in 2022 to $30.9 million in 2023 and to $43.9 million in 2024.
“We believe 4Front Ventures presents an opportunity for investors to gain exposure to a US multi-state operator. The strong operational experience from a competitive mature market continues to improve its operations across other states, driving yield increases and improved operational performance,” Gilmer wrote.
At press time, Gilmer’s new C$0.50 target represented a projected one-year return of 117 per cent.
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