Verano is a Buy in US cannabis stocks, says Haywood

Neal Gilmer of Haywood Capital Markets likes what he sees of the new acquisition by Verano Holdings (Verano Stock Quote, Chart, News, Analysts, Financials CSX:VRNO), maintaining a “Buy” rating and C$35/share target price for a potential return of 157 per cent in an update to clients on Tuesday.

Headquartered in Chicago and founded in 2014, US cannabis name Verano Holdings engages in the cultivation, processing and retail licensing of cannabis as a vertically integrated multi-state operator.

Gilmer’s latest report comes after Verano announced an agreement to acquire Goodness Growth Holdings, a physician-led, science-focused holding company with a multi-state cannabis company subsidiary, Vireo Health, Inc., and a science and intellectual property incubator, Resurgent Biosciences, Inc. The transaction comes with a price tag of $413 million (all report figures in US dollars, unless otherwise noted) to be paid out entirely in shares, implying a market price of C$3.03/share.

“We view the transaction positively with long-term upside as Verano now can position itself in advance of what is likely to become a significant cannabis market in New York while also strengthening its position in several other coveted markets,” Gilmer said.

Gilmer said for Verano, the acquisition is a key to entering multiple new states including Minnesota, New Mexico and most prominently New York, where Verano will have one of only 10 vertically-integrated licenses in the state, to bring the company’s total operations to 18 states, with 15 in active operation.

“Each of these markets are expected to be high value given their limited license structure, upcoming adult-use programs or both in the case of New York,” Gilmer said.

All told, the acquisition of Goodness will add 18 active dispensaries, five cultivation and processing facilities, an R&D facility and six new brands to Verano’s portfolio of assets, including Vireo, 1937, LiteBud, Kings & Queens, Hi-Color, and Amplifi. Once the deal closes, Verano’s footprint will increase to 111 active dispensaries and 17 cultivation facilities spanning 1.3 million square feet.

“We have always viewed New York as a strategic market to solidify our existing east coast presence, particularly ahead of the state’s adult-use rollout, as we further expand the Verano platform and exceed a milestone of operating more than 100 dispensaries across the country,” said George Archos, Verano Founder and CEO in the company’s February 1 press release.

“Adding the New York, Minnesota and New Mexico markets to our portfolio, with full vertical integration, provides Verano with a solid foundation for future growth. We’re excited to welcome new colleagues to the Verano family and look forward to serving patients and consumers in communities across these great states,” said Archos.

Gilmer projects solid growth for Verano in the next few years, beginning with a year-end projection of $766.1 million in revenue for 2021 for year-over-year growth of 115.9 per cent. Gilmer then projects the company to break ten figures in 2022 at $1.06 billion for implied year-over-year growth of 38.3 per cent, with a further increase to $1.31 billion in 2023, suggesting a year-over-year increase of 23.5 per cent.

Meanwhile, in his margin analysis, Gilmer projects the company’s EBITDA margin to drop from 48 per cent in 2021 ($367.2 million) to a projected 44 per cent ($468.6 million) in 2022, then dropping again to 42 per cent ($544.1 million) in 2023.

Gilmer sees the company’s gross margin remaining fairly constant, growing from a projected 59 per cent ($452.6 million) in 2021 to a projected 61 per cent ($646.3 million) in 2022 before a slight dip to 60 per cent ($781.8 million) in 2023.

From a valuation perspective, Gilmer foresees the company’s EV/Revenue multiple dropping from 10x in 2020 to a projected 4.6x in 2021, then to 3.3x in 2022 before dipping to 2.7x in 2023. In terms of the EV/EBITDA multiple, Gilmer forecasts a drop from 20.7x in 2020 to 9.6x in 2021, then to 7.5x in 2022 before hitting 6.5x in 2023.

Ultimately, Gilmer said the Goodness acquisition is more about long-term positioning for Verano and he believes the company is moving in the right direction.

“Verano is executing on its objectives and has runway for growth going forward, through organic expansion and the benefit of its acquisitions,” Gilmer said. “Verano remains undervalued with its peer group despite its strong operating metrics.”

“The company has been profitable since it was founded and is expected to continue operating with strong margins,” Gilmer wrote. “Verano’s long history and depth in their core markets such as Illinois, Florida and Maryland allow for operations to be optimized. Early-stage exposure into key growth markets such as Arizona and New Jersey position the company for strong growth in 2022.”

Verano’s stock price has hit a valley over the last 12 months with a 56.3 per cent loss in that time, and a 10.8 per cent loss since the start of 2022. February 19 saw the stock spike to a 52-week high of C$31.99/share, but it has been on a downward trend ever since, getting as low as C$12.40/share on November 4.