The Analyst:
Pablo Zuanic, from Cantor Fitzgerald, rated Cresco Labs, Inc. (OTC:CRLBF) as Overweight with a price target of $19.00.
The Thesis:
According to Zuanic, the acquisition of Columbia Care (OTC:CCHWF) fits a logical M&A that is characteristic of the industry's ongoing consolidation.
“As per our math, the Top 20 MSOs accounted for 18% of the legal cannabis market in 2019, compared with 50% now. In our view, the longer legalization (and banking reform) takes, the more the industry will consolidate. (...) MSOs' scale will matter regarding breadth (footprint), depth (state-level market share), vertical integration (seed to sale), and brand portfolio. Regardless of when reform comes, it will be the larger and more-established operators that will get the attention of new institutional money coming to the space,” Zuanic explained.
Through the acquisition, Cresco gains depth in cannabis markets such as Florida and Pennsylvania and enters New Jersey and Nevada.
Cresco trades at 3-4 points above Columbia Care in Zuanic’s EBITDA estimates for 2023. The analyst noted the ownership dilution of CCHWF (shareholders will own 35% of the new company) is consistent with the EBITDA contribution.
Zuanic estimates Columbia Care will contribute 40% of the pro forma company's sales, and ~35% EBITDA “given its lower margins vs. Cresco. “Over the next two years, we believe the EBITDA gap between the two companies would have narrowed,” added the analyst.
Zuanic says Columbia Care shareholders will ride the Cresco upside, while Cresco gains access to strategic states, doubles its Florida retail footprint and bulks up its Pennsylvania presence.
Highlights From 2021’s Fourth Quarter
Zuanic noted that sales of approximately $218 million were below the guidance of $235-245 million and up 1% sequentially.
“Management attributed the miss partly to macro headwinds and price pressures in key states (including CA) while noting Cresco held or gained a share in seven of 10 states. The company stated ex CA, sales were up 6% sequentially, including M&A,” Zuanic said and highlighted that Cresco closed two deals in Pennsylvania for $170 million which added $2.5-3.0 million to the quarter.
“Gross margins were stable at >54%, as price pressures were offset by growth in high-margin states (PA, IL) and the better mix in CA despite liquidating most of the 3rd party inventory left.”
EBITDA margins were stable at 26% while cash flow from operations amounted to $38 million vs. adj EBITDA of $57 million.
Outlook: Flat Sequential Growth In The First Half of 2022
Zuanic explained the Headset data point to a mid-single market decline for the first quarter of 2022 and “Cresco is pointing to muted sequential growth for 1H22.” However, he estimates the recent deals combined with the new facility in Fall River, Massachusetts should contribute to revenues.
In addition, product innovation in Florida (gummies, disposable vape pens, a wider flower assortment) should contribute to sales.
“Continued price pressures in key markets and market softness will likely offset other drivers of growth. The profit margin structure should improve as Massachusetts and Ohio become larger contributors to revenues, although this may be offset by ongoing price pressures,” concluded Zuanic.
Image By Ilona Szentivanyi.
