Viridian Capital Advisors analyst Jonathan DeCourcey is looking into his cannabis crystal ball and says skip 2022 – it’s 2023 that should be the focus for investors. He points out that 2023 will be the first full year with adult-use cannabis sales in the key markets of Connecticut, New Jersey, and New York. He wrote,
Based on 2023 expectations, top operators are likely to look much cheaper overall than they do today.
The analyst said that the cannabis market’s current bear market is unwarranted and presents buying opportunities. While company estimates for 2022 have been increasing, he says the real story will be what happens in 2023. He wrote, “As we look to 2023, the opportunity becomes even more favorable. Even omitting the share gains for large public players (both through execution and consolidation) and conservatively growing estimated 2022 revenues by the roughly 20% growth rate for broader US cannabis sales in 2023 and leaving adjusted EBITDA margin levels unchanged from 2022 estimates, US cannabis companies will be trading at a roughly 50% discount to the one year forward projections of this winter with 2023 multiples (’23EV/Sales at 2.1x and EV/EBITDA at 6.3x). These valuations levels are incommensurate with the high growth nature of US cannabis and look inexpensive even relative to slower growth more mature industries.”
In his opinion, many of the companies considered to be the top operators for 2023 are not necessarily the biggest by market cap or the most expensive today. His big list of companies that he believes look even better when considering the 2023 numbers are Ascend Wellness, Ayr Strategies, Body & Mind, Cansortium, Columbia Care, Glass House, Goodness Growth, Jushi, TerrAscend, and Tilt Holdings. The two companies DeCourcey specifically highlighted in his report that was published on October 15, was 4FrontVentures (OTC: FFNTF) and Planet 13 (OTC: PLNHF).
Viridian has a Buy rating on 4Front and a $2 target price. The analyst noted that the 2022 estimates only represent about 40% of the company’s long-term plans. 4Front recently broke ground on a cultivation and production facility in Illinois called “Big Daddy.” The first phase of this project will be a 250,000 square foot cultivation facility that will open in early 2023 giving the company 65,000 square feet of cultivation versus its current 9,000 sq. ft. today. This expansion will allow 4Front to sell more house brands at its own locations, plus open itself up to wholesale business. The company has said that the initial buildout will allow it to produce $100 million of sellable product.
In addition to Illinois, the Massachusetts operations are expanded by a recent acquisition of New England Cannabis Corporation. 4Front said that NECC is expected to be significantly accretive to its EBITDA expectations for 2022 and will immediately scale 4Front’s presence as a dominant wholesaler and producer in the state. The acquisition is said to more than double 4Front’s total flower canopy in Massachusetts to over 30,000 sq. ft, with further expansion potential for up to an additional 10,000 sq. ft. of canopy, and will approximately triple 4Front’s kitchen, processing, and distribution space.
4Front also has an outstanding license application in New Jersey, which could also present a big opportunity. DeCourcey also pointed out that 4Front could end up being a potential takeover target by a larger MSO.
Planet 13 was truly beaten up by the pandemic. As a dispensary superstore that thrived on tourist traffic, the lockdown was especially difficult. Fast forward to today and Vegas is coming back. The MJ Biz conference next week is sure to bring lots of attention to the flagship store in Las Vegas and could be a short-term catalyst for the stock. Beyond that, the company has also opened a superstore in California.
Yet the analyst stated that right now, Planet 13 appears expensive as it has an EV/EBITDA multiple of 13.8x or a roughly 81% premium to the broader peer group. Still, he doesn’t think the 2022 outlook tells the whole story for the retailer. Looking even further out to 2023 results, Planet 13 has plans to open another store in Chicago now that it has a license through a joint venture and it acquired a Harvest license in Florida.
“We anticipate additional expansion even beyond those two initiatives coming given the company’s well-capitalized balance sheet and management’s stated initiative of having at least eight Superstore locations open within the next five years,” wrote the analyst. He suggested Planet 13 could potentially buy smaller assets that could be built out and more stores in tourist-friendly cities. He also thinks Planet 13 could be a target for a larger MSO to acquire.