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Co. Still Undervalued Post Solid Q2/23

Source: Scott Fortune


August 17, 2023 ( Newswire) The multistate operator is on a growth trend and just raised its free cash flow guidance for the year, noted a ROTH Capital Partners report.

Verano Holdings Corp.'s (VRNO:CSE; VRNOF:OTCQX) "solid execution" in Q2/23 led to a revenue beat, reported ROTH Capital Partners analyst Scott Fortune in an Aug. 8 research note. The company produces and sells cannabis products in the U.S. for medical and recreational uses.

241% Projected Return

ROTH maintained its US$10 per share price target on the multistate operator (MSO), the current share price of which is about US$2.93, Fortune noted. The gap between these two figures reflects a potentially significant return for investors of 241%.

Fortune also pointed out that Verano should be, but is not, trading on par with the top MSOs given its "profitability profile, lean operations and national footprint." Instead, the company is trading at 4.4 times 2023 EBITDA, whereas the top MSOs are trading at 6.9 times.

Verano remains a Buy.

Solid Q2/23 Earnings

Fortune discussed Verano's financial results for the quarter.

The Illinois-based cannabis firm generated revenue of US$234.1 million (US$234.1M), up 3% quarter over quarter (QOQ), reported Fortune. Revenue exceeded management's expectations as well as consensus and ROTH's estimates of US$231.2M and US$229.3M, respectively.

Fortune attributed the revenue beat to wholesale and retail sales in New Jersey, where it holds a leading 21% market share, and Connecticut, where it is ramping up adult-use cannabis sales and has about a 40% share of that market. New retail openings also contributed, as did relatively stable pricing. The latter, however, was offset some by weaker retail and price pressure in Pennsylvania and Arizona.

Verano's adjusted EBITDA was US$71.5M, up 1% QOQ, versus below ROTH's US$72.2M projection.

Total Q2/23 opex was US$84.7M, 36% of sales, reflecting a 13% QOQ increase. Opex was higher than ROTH's forecast of US$78M, 34% of sales.

Gross margins increased QOQ to 49.2%.

"The company continues to increase cost efficiencies and manage inventory reduction levels to reach 100 days, which should lead to margin improvement into 2024," Fortune wrote.

Cash Flow Notable

Also of note, in Verano's Q2/23, Fortune wrote, are that the company delivered on free cash flow (FCF), US$16M, and even increased FCF guidance for full-year 2023 while maintaining a capex of US$35-50M. Capex was US$8M.

Management's new 2023 FCF guidance is US$65-75M, up from the low end of US$50M.

At the end of Q2/23, June 30, 2023, Verano had US$103M in cash and US$420M in debt.

"With operating cash flow likely above US$100M on the year and 280E state tax relief (Conn., Ill., N.J.), we expect reduced deferred tax balances and additional cash flow to pay down debt (due 2026) or mergers and acquisitions opportunities in new markets or deeper in existing states," Fortune wrote.

More Growth To Come

Verano is expected to continue its growth trend throughout the remainder of this year, Fortune wrote. For Q3/23, ROTH models revenue of US$241.5M, 3% higher than that in Q2/23.

This near-term growth should come from the recently added new adult-use markets (Maryland and Connecticut), wholesale expansion in New Jersey, and new stores coming online in Florida.

However, if Verano continues controlling costs, affecting operating efficiencies and decreasing capex and inventory, these should lead to a boost in cash flow.

For FY23, ROTH estimates revenue of US$950.2M and adjusted EBITDA of US$294.5M. These estimates are tempered, Fortune wrote, given the existing challenges in the cannabis industry.

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