Trulieve Cannabis Corp (TCNNF)

[FUNMAN]

Trulieve: Bullish Thesis Unchanged Despite Reefer Madness

Mar. 01, 2021 6:36 AM ET

Read the article here to see the charts and graphs:

https://seekingalpha.com/article/4410238-trulieve-bullish-thesis-unchanged-reefer-madness

Summary

* Trulieve shares are up, but have lagged select Canadian cannabis names (Tilray, Sundial) during the current reefer madness.

* We believe Trulieve remains undervalued relative to other MSOs, and its growth should accelerate in 2021 after adding PA and MA to its portfolio.

* Despite the extreme volatilities in some Canadian cannabis stocks recently, Trulieve shares remain attractively valued.

* We think Trulieve (OTCQX:TCNNF) remains one of the best-positioned cannabis stocks in the market due to its successful Florida franchise and growing presence in other states. The stock has been a top performer among MSOs in the past year, but we believe it remains undervalued on a relative basis. We are confident that Trulieve will continue to be a solid performer, given its best-in-class financial performance, multiple growth drivers, and positive industry tailwinds that support meaningful upside in the stock.



(All amounts in USD)

Secular Bull Market

We believe Trulieve and other U.S. MSOs are entering a bullish secular market. The stock is up ~47% in 2021 so far after rising ~170% during 2020. The growth was driven by two major tailwinds. Firstly, the stock enjoyed a strong 2020 after COVID-related stay-home orders led to surging cannabis consumption across the country. After an initial dip along with the whole market, Trulieve rebounded sharply and continued to soar after it posted high double-digit organic growth across its stores. The second catalyst that benefited Trulieve was the November presidential election and ensuing Georgia Senate runoff that handed Democrats control of the Senate. It is widely expected that lawmakers will begin to push for a new cannabis reform bill in the coming months and real progress could be made this time, unlike previous futile tries. Several Democratic lawmakers including Senate Majority Leader Chuck Schumer have voiced strong support for cannabis legalization and vowed to release a unified reform bill in early 2021. We think any real progress on the legislative front would spark a further rally in U.S. cannabis stocks among which Trulieve is a leader.



(Source: Bloomberg)

Investors have focused on recent volatilities in select Canadian cannabis stocks including Tilray (TLRY) and Sundial (SNDL). Some of us are reminded of the 2019 crash of cannabis stocks that destroyed billions of market value and took a couple of years to recover. So far, the extreme volatility in these few names has not affected Trulieve in any meaningful way. For example, Tilray has dropped 55% during the last two days last week but Trulieve was only down ~10%. We are encouraged by the resilience observed in Trulieve trading in the midst of the current market condition. If the stock drops further, we would see it as a buying opportunity, given our thesis as discussed below.

Attractive Valuation

The reason why we are so bullish on Trulieve is that the stock has a rare combination of best-in-class financial performance and attractive valuation. The company has delivered an astounding streak of financial results including doubling its revenue in each of the last three years while maintaining an impressive ~50% EBITDA margin throughout the years. The company's primary growth driver was its Florida business that controls half of the state's medical market. The Florida medical market is one of the largest in the country with an estimated annual sales approaching $1 billion and 485,000 registered medical users. Trulieve is the clear market leader in Florida and it continues to expand with new store openings and introducing a new product offering such as edibles. The biggest catalyst for Trulieve would be the legalization of recreational cannabis in Florida which remains a 2022 event at the earliest. The reluctance among Republican senators in Florida to take action on the matter means the most likely path to recreational legalization would be through the 2022 state ballot.



(Source: Filings)

The second attractive feature of Trulieve is its cheap valuation which is rare considering its impressive financial performance and asset quality. The stock has a market cap of $5.7B and trades at ~10x EV/Sales and ~21x EV/EBITDA based on annualized Q3 numbers (multiples will decrease once Q4 results are released). The company is cheaper than more MSOs by a wide margin; for example, TerrAscend (OTCQX:TRSSF) trades at ~50x EBITDA and Curaleaf (OTCPK:CURLF) trades at ~65x EBITDA. We think Trulieve is a rare gem within the space and deserves more credit for its profitability and growth.



(Source: Author)

The biggest concern we heard from investors regarding Trulieve was its rather limited presence outside Florida. That has changed in the past year as the company focuses on expanding into new markets prudently. Trulieve acquired a local business in Pennsylvania and recently won licenses to expand into West Virginia. We expect the company to continue evaluating other acquisition opportunities and potential markets include Illinois and New Jersey. Trulieve has outlined its hub strategy, but the reality is that interstate commerce remains federally illegal until legalization is implemented. We expect the Northeast states to follow recent actions in NJ and IL to implement recreational legalization in the coming years.



(Source: IR Deck)

Conclusion

In summary, we expect Trulieve to continue its rapid growth driven by organic growth in Florida and new revenue contributions from recent acquisitions in PA and MA. Furthermore, the company is well-positioned and has access to capital markets for more M&A activities. The most accretive acquisitions are asset deals that lead to entry into new markets, and we expect Trulieve to stay away from large-scale all-stock deals, given lofty multiples. The stock looks cheap based on EV/Sales and EV/EBITDA metrics compared with other MSOs which underpins the attractive nature of this stock. We believe the market has wrongly placed a discounted multiple on Trulieve due to its early reliance on Florida. The company has already entered five additional states and is poised to continue its expansion both organically and through acquisitions. Furthermore, a very substantial catalyst is the recreational legalization in Florida, which could be included in the 2022 state ballot. If and when that happens, Trulieve is positioned to become the biggest winner, given its 70+ retail footprint and ~2 million sq ft. of cultivation capacity. We remain bullish on Trulieve despite recent market volatility.