Following news from Vext Science (Vext Science Stock Quote, Chart, News, Analysts, Financials CSE:VEXT) Echelon analyst Andrew Semple has trimmed his price target on the stock.
On October 2, VEXT announced it would acquire two Ohio retail locations and announced a non brokered private placement of $10-million.
“The addition of two dispensaries to our growing vertical footprint in Ohio represents a critical step toward achieving scale and ensuring long-term returns on capital in this attractive growth market,” said CEO Eric Offenberger. “The overall market environment, particularly from an equity perspective, remains challenging, but now is the right time for Vext to build a platform that will generate growing profitability and cash flow. We appreciate the support of our long-term shareholder base and insiders who have stepped up to support what I am confident will lead to significant value creation.”
In a research update to clients Semple maintained his “Speculative Buy” rating on VEXT, but lowered his price target from $1.00 to $0.70. The analyst explained his rationale and his take on Monday’s news.
We view the strategic rationale behind the transaction favourably,” he wrote. “The new stores should contribute meaningfully to Vext’s profitability without adding significant overhead, and the ability to complete an acquisition on an equity-financed basis will help to de-lever the balance sheet. However, the equity financing will increase basic shares outstanding by 39%, and with an issue price of $0.17/shr, this is materially dilutive to our model. We maintain our Speculative Buy rating but reduce our price target to C$0.70/shr (prev. C$1.00/shr) based on a DCF valuation of C$0.66/shr (prev. C$0.97/shr). The lower valuation primarily reflects equity dilution, though we also trimmed our exit FCF multiple to 20.0x (prev. 22.5x) due to the Company’s equity issuance likely making its valuation stickier to lower levels. Although our price target declines, on a risk-adjusted basis we are overall neutral on this acquisition. In our view, the negative impact of equity dilution to our DCF valuation is mitigated by a de-risking of the balance sheet and cementing growth opportunities within Ohio, as well as the strategic value of having additional stores within the state (e.g., better buying power, more levers to move cultivation output).
Semple thinks VEXT will post Adjusted EBITDA of $9.3-million on revenue of $38.2-million in fiscal 2023. He expects those numbers will improve to EBITDA of $18.7-million on a topline of $54.2-million the following year.
The analyst’s new price target implied a return of 126 per cent at the time of publication.
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