Viridian Capital Advisors has been helping cannabis companies raise capital for years and now the company has begun initiating research coverage for various companies. The first three receiving a rating are 4Front Ventures (FFNTF) , Ayr Wellness (AYRWF) (formerly Ayr Strategies), and Indus Holdings (INDXF) .
In its recent industry report, the company said: "Specifically, we plan to focus on to-date underappreciated, high-quality names which are poised for outperforming growth and profitable operations." The company said that it expects at least eight states to pass recreational cannabis legislation this year. Director of Equity Research Jonathan DeCourcey wrote, "By 2025 we believe 36 states will permit recreational sales (from 11 today). Meanwhile, we believe medical cannabis will be legal in all 50 states by the end of our forecast period. Importantly, we do not anticipate any broad federal legalization is coming. This means well-run operators can carve out defensible and sustainable competitive advantages longer term within individual state markets"
Viridian initiated coverage on 4Front with a Buy rating and $1.55 price target on January 26 and the stock was recently trading at $1.78. 4Front is a national multi-state cannabis operator and retailer that specializes in low-cost quality branded cannabis products. The company manufactures and distributes a portfolio of over 25 cannabis brands including Marmas, Crystal Clear, Funky Monkey, Pebbles, and the Pure Ratios wellness collection, distributed through retail outlets and their chain of strategically positioned Mission branded dispensaries. 4Front said that it achieved positive operating cash flow in August and expects a positive adjusted EBITDA starting in the third-quarter of 2020. Viridian wrote, "Despite challenging market dynamics in Washington (lowest wholesale prices in the country), the company is profitable in the state through low cost, high yield cultivation and production."
The research report said 4Front is leveraging its proven production capabilities in expansion markets where wholesale dynamics are more favorable. "In these markets, the company compliments product sales by owning retail operations. After a slow rollout of state expansion initiatives due to macro-headwinds and some financing challenges (which have now been resolved), 4Front is finally able to execute," according to DeCourcey.
He went on to write, "With its now fully-funded presence in five of the largest markets in the U.S., and in being a rare retailer with multiple recreational dispensaries in Massachusetts and Illinois (including Greater-Boston and Chicago), 4Front has a portfolio of operations that is be enviable to any operator in the industry. Unlike many operators in the space which require additional state expansion for growth, 4Front is positioned for outperforming growth within current markets."
Also on January 26, Viridian initiated coverage of Ayr Wellness with a Buy Rating and a $38 price target. The stock was recently selling at $23.98. AYR has its main operations in Massachusetts and Nevada. Viridian wrote, "Due in part to its presence to-date in only two states and lack of recreational retail licenses in Massachusetts, the company has been discounted by investors and given a valuation incommensurate with its industry leading execution." Having said that, Ayr signed a Definitive Agreement to buy Blue Camo, LLC in a deal first announced in November 2020. Blue camo's operations include three Oasis-branded dispensaries in the greater Phoenix area. Ayr said it was buying the membership interests in GSD NJ LLC, a licensed operator in New Jersey, for upfront consideration totaling $101 million. Also in December, Ayr closed on the purchase of CannTech PA for $57.4 million
The company has been raising capital and closed on its previously announced offering of 12.5% Senior Secured Notes that will raise $110 million for the company, that was upsized nearly 50% the initial size of $75 million due to substantial demand, combined with the proceeds from in-the-money warrants and the cash they generate every day from operations, giving them a war chest of over US$150 million in cash on the balance sheet. DeCourcey wrote, "Our $38 price target presents >30% upside to current levels and represents an EV/EBITDA multiple in line with the broader peer group of US cannabis companies at 16.7x '21E. Our price target reflects a continuation of AYR's discount to other leading operators (20.5x for largest five MSOs) presenting an opportunity for additional upside with the completion of acquisitions and buildout of assets in expansion markets."
Viridian initiated coverage of Indus Holdings with a Buy Rating and a $2.00 price target. The company was recently trading at $1.59: "INDS represents a successful turn-around story following an infusion of capital and management change last year. Management has narrowed the focus of operations (to California cultivation and production), and reduced overhead costs to drive a profitable business."
However, for the quarter ending December 31, 2020, Indus said it was "expecting lower harvest yields than the previous quarter due to plant stress experienced from sealing greenhouses to prevent poor air quality from entering due to wildfires in California that occurred in late summer, early fall 2020, at a time when outdoor temperatures were also elevated. In connection with this expectation, on December 3, 2020, the company announced that based on preliminary financial information and subject to year-end closing adjustments, it expects net revenue for the fourth quarter of 2020 to be approximately $9.5 million to $11.5 million, a decline from the previously expected approximately $14 million." Prior to this announcement, Indus had said it expected some decline in yields, however, "the deterioration in yields has been more pronounced than anticipated." Indus did say that new plantings in the current quarter that will harvest in the first quarter of 2021 are expected to return to normal yields.
Still, Viridian wrote, "We expect results and share gains to translate into outperforming investor returns and a premium valuation for the company. Our $2 price target represents roughly 70% upside to the latest stock price and reflects a justifiable valuation premium relative to a broader market peer group based on 2021 EV/Sales (4.7x vs. 4.1x) given the company's exclusive California focus and the fact that estimates are based only on execution rather than factors beyond management's control."
Viridian has been involved with the cannabis industry for years and brings a deep knowledge of the companies. It will be interesting to see how this research measures up to the banking research from larger firms for which cannabis is only a portion of the coverage and not the complete focus.