Zuanic concedes that California may not be a good argument for the future of a cannabis company considering most MSOs (multi-state operators) have exited the market, but that’s precisely his point. The analyst thinks that the state is ripe for consolidation among the remaining players. It’s a fragmented market and the report stated that the two largest operators only account for 4% of active licenses.
He thinks that companies with strong brands, balance sheets, and well-performing stores could benefit from this transition. Gold Flora is the third-largest retail chain in the state, is in the top nine brands, and has $32 million in cash. He writes, “On our 2025 estimates, the stock only trades at 0.7x sales and 4x EBITDA. We do not assign price targets, but a 10-20x upside is not an unreasonable expectation.”
Since retail accounts for 88% of the company’s revenues, Zuanic took a hard look at that metric. The company has 17 stores in various locations but with multiple names due to acquisitions. The stores are called Airfield, Caliva, Calma, Coastal, Deli, Higher Level, King’s Crew, and Varda. Zuanic said that the company doesn’t plan on trying to rebrand everything under one name as some of these stores were already established with their customers. However, he noted that the company plans to expand the store network, especially in license-restricted municipalities and the coastal/touristic areas. He also sees the company trimming underperforming stores as well.
Concerning the brand side of the equation, the report stated that Cruisers accounted for almost half of the company’s brand sales sold across the state, followed by Jetfuel (about a fifth of Cruisers), Aviation, and Gold Flora. Zuanic said that in California, brands matter and that there was an opportunity to grow market share. There are also some good metrics on cultivation. Zuanic wrote that by mid-2024, the company will have quadrupled indoor growth capacity, funneling more products to its stores. The report stated, “According to management, the company’s industry-leading cultivation costs also allow for profitable bulk wholesale of any excess production as well as for contract opportunities.”
With regard to the financial side of the business, Gold Flora is comfortable with $32 million in cash and net debt is only 0.1x sales. The company says it is aiming to be free cash flow positive over the next two years. With the California market in disarray, investors might not be willing to jump in setting Gold Flora up to capitalize as it is a buyer’s market in the state.
While Zuanic says he doesn’t assign price targets, he did write, “But if we took 15-20x 2025 EBITDA, then by Dec’24 (on CY25 numbers) the stock would be at $1.40-2.00.” The stock was lately selling at 20 cents.
The background for StateHouse was similar to Gold Flora as both are mostly located in California. Looking at StateHouse’s numbers in the third quarter, half of the revenues came from the company’s store network and the balance from sales to 3rd party stores and producers. StateHouse has 12 stores in the state but plans on closing almost a third of those stores before potentially expanding again. Despite the store’s weakness, the report stated that “The company’s greenhouses and production facilities are among the best in the state (to the level its grow know-how is in demand), with own branded flower garnering prices above those of say, Glass House, and the suite of STHZF brands ranking among the 8 top groups in the state.” The cultivation success has led the company to a new source of revenue with a consulting business.
The financial picture for StateHouse is less rosy than it was for Gold Flora. The company’s revenues fell in 2023 even though its cash flow grew. StateHouse ended the third quarter of 2023 with $114 million in net debt. The report wrote that at 1.1x sales, this is among the highest in the MSO group, with cash at $2 million and debt booked at $116 million (interest expense of $4.2Mn was 16% of sales). The debt is definitely an issue for StateHouse. The analyst wrote that debt repayments are as follows: $34 million in 2025 (Feb/Apr), $6 million in 2026, $81 million in 2027, and suggested the company may need to restructure debt repayments again.
The neutral rating seems to also touch on the stock valuation. Despite not wanting to issue a target price Zuanic wrote that he calculated a spot enterprise value of $198 million, which means StateHouse trades at 1.9x current sales, well above comparable peers. Considering the stock currently sells at three cents a share and could be subject to more dilution, Zuanic mused that StateHoude could be a takeover target. Unfortunately, the debt remains a huge challenge to overcome.