Look for US cannabis company Schwazze (Schwazze Stock Quote, Charts, News, Analysts, Financials NEO:SHWZ) to continue expanding its empire in New Mexico. That’s the skinny from Beacon Securities analyst Russell Stanley, who updated clients on the stock and company on Monday and reiterated a “Buy” rating.
Schwazze, which has vertically integrated operations in Colorado, where it has the #2 retail footprint, and in New Mexico, where it’s also #2 in retail, announced on Monday the completion of its acquisition of Sucellus, which operates in New Mexico as Everest Cannabis.
Everest has vertically integrated operations including 16,000 sq ft of indoor grow capacity, 34,000 sq ft of outdoor capacity and an 8,500 sq ft manufacturing footprint, along with 14 combined adult-use and medical dispensaries.
“This acquisition fits well within our growing portfolio of retail brands alongside R.Greenleaf, and firmly positions us as a top operator in the New Mexico market,” said Nirup Krishnamurthy, President of Schwazze, in a press release.
The $38 million purchase price includes $12.5 million in cash, a four-year $17.5 million unsecured note paying five per cent and $8 million in stock. There is also an earnout of up to $8 million, payable in stock and based on revenue of the acquired stores over the first 12 months. (All figures in US dollars except where noted otherwise.)
Stanley said the added stores takes Schwazze to 32 across New Mexico, which is just behind leader and private company Ultra at 38 locations.
“We continue to expect SHWZ to work toward development of a 50-60 store platform in New Mexico. As discussed in last week’s update, legal sales in New Mexico are up 15 per cent quarter-to-date based on April + May data vs. Jan + Feb. However, NM features a relatively large number of retailers (630+ adult-use stores), and we expect the eventual rationalization to present SHWZ with very attractively priced acquisition targets,” Stanley wrote.
Stanley said Schwazze is coming off a strong first quarter where top and bottom lines beat his forecasts, and he said SHWZ is showing EBITDA margins that rank very high compared to the rest of the US cannabis space. The analyst said Schwazze is likely to counter ongoing price pressure by leveraging margin expansion opportunities like centralized buying and distribution, automated manufacturing and increased sales of house brands.
“Given SHWZ operates in two intensely competitive states that other operators have largely avoided/exited, we view Schwazze’s adjusted EBITDA margins as particularly impressive,” he said.
Stanley maintained a C$3.00 target price on SHWZ, which at press time represented a projected one-year return of 107 per cent.