Harvest Health and Recreation Inc (HARV)

[JohnCM]

Harvest Health: Recreational Cannabis Play

Feb. 02, 2021
Seeking Alpha

Harvest Health is poised to benefit from the launch of recreational cannabis in Arizona.

The MSO should top $100 million in quarterly revenues this year.

The stock only has an EV in the $1.4 billion range and trades at just 15x '22 EBITDA targets.

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Harvest Health & Recreation (OTCQX:HRVSF) was one of the worst performing U.S. multi-state operators (MSOs) through 2020 as the company failed on acquisition plans and raked up debt. The MSO remains an interesting play as the company has limited sales from recreational cannabis due to a current focus on medical cannabis states. My investment thesis remains bullish on the stock despite the big rally off the lows.

Recreational Cannabis Opportunity

The MSO obtains over 50% of revenues from the Arizona market and the company just launched recreational sales in their 15 dispensaries. During the November elections, Arizona residents approved the sales of recreational cannabis. In addition, Harvest Health has three additional vertical licenses obtained from Devine Holdings as part of their settlement.

Harvest Health has a commanding market share lead in the state having the largest amount of open stores at 15. Curaleaf (OTCPK:CURLF) is next at 8 stores with most companies below 3 in a state with 130 dispensaries. Even better, only 86 stores launched recreational cannabis on January 22 leaving an expanding market share for Harvest Health. The stores opened to long lines as demand for recreational cannabis was high.

While Arizona is a very important state for Harvest Health, the company has solid operations in Florida, Maryland and Pennsylvania that all are limited to medical cannabis sales as of now. For a company with an estimated 2020 revenue base of $228 million, the vast majority of sales were all medical cannabis providing immediate upside as these states approve recreational cannabis in the next few years. The company is one of the few MSOs to not benefit from selling in recreational cannabis markets such as Illinois which provide substantial revenue upside over just medical cannabis.

The Arizona market is forecasted to jump from a $1.06 billion run rate to nearly double to $1.9 billion by 2025. The recreational cannabis portion of the market is forecast to jump to $400 million this year and grow to over $700 million by 2025.

Without any market share shifts, Harvest Health is set to generate Arizona retail cannabis revenues around $90 million and push the amount closer to $150 million in a few years. The MSO could take market share, if some dispensaries don't open up for recreational cannabis sales.

Other markets such as Maryland and Pennsylvania are forecast to see sales nearly double by 2023 when expectations exist for recreational cannabis to obtain approvals. Florida remains the second biggest market for Harvest Health and the state is up in the air on when adult-use cannabis will get approved. Regardless, all of the shifts to recreational cannabis provide immediate upside for any MSO involved in those states.

Finally Profitable

For the last couple of years, Harvest Health was running the business more like a Canadian cannabis LP with excessive expenses. A big part of the issue was a plan to merge with Verano Holdings and Devine Holdings back in early 2019 to form one of the largest MSOs. The company had plans to operate up to 200 facilities in 16 states causing Harvest Health to create an elevated expense structure with the expectations of massive growth that didn't materialize.

Anybody just needs to review the following chart to see how quarterly revenues have gone from $20 million in Q1'19 to over $60 million now. During this time, SG&A expenses have remained flat around $20 million after the initial ramp up to over $30 million. In the process, gross profits have grown to nearly $30 million in Q3'20 allowing Harvest Health to suddenly produce a quarter with EBITDA profits in excess of $10 million. All of these impressive improvements in the income statement are before even getting to the Q4 results or 2021 where recreational cannabis in Arizona should boost profits from existing stores.

Based on corporate targets, analysts have Harvest Health boosting Q4 revenues to $65 million before the company starts big $10 million sequential jumps in the next three quarters. The MSO would be viewed in a far different light exiting 2021 with quarterly revenues topping $100 million with substantial EBITDA margins after the company struggled mightily in the prior couple of years.

The biggest risk to the stock is losing market share in Arizona along with the $294 million debt load. Harvest Health has $71 million in cash at the end of September. The recent property deal in Florida with Innovative Industrial Properties (IIPR) provides a cash infusion of $23.8 million along with another $10.8 million in tenant improvements to be reimbursed. The move is on top of raising $32.4 million via a financing offering in October.

The stock has an enterprise value in the $1.4 billion range and only trades around 15x 2022 EBITDA estimates of $90 million. Harvest Health will trade higher as their top states open up to recreational cannabis and boost sales.

Takeaway

The key investor takeaway is that Harvest Health is a cheap stock despite the large rally in the last year. The MSO will get a big boost from Arizona recreational sales this year sending the stock higher.