AltaCorp Capital analyst Kenric S. Tyghe is liking the new acquisition announced by US multi-state operator Harvest Health and Recreation (Harvest Health and Recreation Stock Quote, Chart, News CSE:HARV), saying that adding Arizona Natural Selections’ stable of cannabis shops further cements Harvest’s leadership in the state of Arizona.
In a research report to clients on Wednesday, Tyghe initiated coverage of Harvest Health with an “Outperform” rating and C$10.50 target price.
Phoenix-based Harvest Health on Tuesday announced the acquisition of Arizona Natural Selections, including four vertical medical licenses (three currently operational dispensaries and one expected to open shortly) and two operational cultivation facilities in Phoenix and Wilcox for a non-material undisclosed amount of stock.
With the purchase, HARV, the largest operator in Arizona, will own 22 vertical licenses in the state, 14 medical dispensaries, four cultivation facilities and three processing facilities.
“We are excited to further deepen our operations in our home state of Arizona expanding our cultivation, processing, and retail operations,” said Harvest CEO Steve White in a press release. “We will look to further the existing reputation and operational excellence Arizona Natural Selections has established across the state and are eager to welcome new members into the Harvest family.”
On the pickup, Tyghe notes that it reinforces HARV’s position as the leader in Arizona, a state with an attractive medical market and where it is widely expected an adult-use market will be legalized in 2021.
The analyst expects additional disclosures on the Arizona Natural Selections deal to come with the late March release of HARV’s fourth quarter financials, yet Tyghe says the acquisition is likely to be at a “deep discount” and says that with an increasingly narrow focus on cultivation to support the expected adult-use market in 2021, the cultivation assets from Arizona Natural Selections are attractive.
“We expect Harvest will quickly bring their operational expertise to the acquired footprint, and effectively leverage the imputed market shares gains. The purchase consideration reflects an immaterial and not disclosed amount of stock. Given current capital market dynamics with smaller players largely shut out, we fully expect Harvest was able to negotiate very attractive terms for this acquisition. We would not be surprised to see several further tuck-in acquisitions in this key market through 2020,” wrote Tyghe.
The analyst initiated coverage of Harvest Health on January 10, 2020, calling the company’s management very well-regarded with a history of strong execution. HARV is angling to complete the major acquisition of Illinois-based Verano Holdings, which would vault Harvest Health into the number two MSO in the US.
“We believe on the back of current market acquisitions and initiatives, Harvest could nearly double its store count in 2020e. The increase in share (on both the increase in footage and traction of key brand initiatives), combined with expected growth of key new markets for Harvest (Illinois), are key positives. We believe recently announced retail (and license) acquisitions further support our thesis,” wrote Tyghe in his coverage initiation.
The analyst thinks HARV will generate fiscal 2020 revenue and adjusted EBITDA of $568 million and $144 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $949 million and $277 million, respectively. (All figures in US dollars except where noted otherwise.)
At press time, Tyghe’s C$10.50 target represented a projected return of 223 per cent.
