Cannabist Co Hldgs Inc (CBSTF)

[JohnCM]

Columbia Care: No Longer A Small Operator

Mar. 05, 2021

Summary

Columbia Care provided solid '21 revenue and EBITDA targets.

After the Green Leaf Medical deal closes, the MSO is poised for recreational cannabis approvals in key Mid-Atlantic states.

The stock is cheap at only 4x '21 sales targets.

The U.S. multi-state operator (MSO) field has been on fire in the last few months as the Democrat victory signaled a move toward federal cananbis legalization in the U.S. Despite the large gains by Columbia Care (OTCQX:CCHWF), the stock has still unperformed other cannabis stocks. My investment thesis remains bullish on the stock as the MSO provides a strong outlook for 2021 without even factoring in recreational cannabis sales in several key states.

Booming Business

Along with releasing preliminary Q4 numbers, Columbia Care provided 2021 guidance. The company plans to report Q4 revenues of $81.8 million with positive EBITDA, but the real story is the 2021 guidance and maybe what isn't included in these numbers.

Columbia Care misses on revenue
Mar. 16, 2021 7:04 AM ET Columbia Care Inc. (CCHWF)By: Gaurav Batavia, SA News Editor 14 Comments
Columbia Care (OTCQX:CCHWF): Q4 Non-GAAP EPS of -$0.21.
Revenue of $81.7M (+233.2% Y/Y) misses by $10.58M. (??????)

Columbia Care guided to 2021 revenues of $515 million at the midpoint which is technically below analyst estimates at $535 million. The amount includes some amount for Green Leaf Medical targeted at closing in Q3, but the forecast doesn't include any revenues for states moving to recreational such as the pending adult-use program in New Jersey.

The amazing part is that a once relatively small MSO is now set to top $500 million in annual revenues before even fully including annual revenues from the largest deal. Guidance doesn't even include the huge upside potential from the pending launch of New Jersey.

Naturally, the amount doesn't include any revenues for adult use in Virginia considering the state won't allow recreational cannabis until 2024, but this means that Columbia Care has easy revenue upside in a few years. Other recreational approvals in New York and Pennsylvania add more revenue potential to the long-term story.

The analyst revenue target for 2022 of $778 million is already rather large, but more importantly the adjusted EBITDA margins are starting to impress considering Columbia Care had a loss in 2020. The pro-forma EBITDA profits of $12 million in Q4 will nicely turn into 20% margins this year.

Deep Value

The biggest issue with the MSOs are valuing the stocks as equity offerings and acquisitions constantly alter the outstanding shares. Not to mention, quarterly results aren't reported until months after the quarters close leaving a substantial period where share counts aren't included in the last reported financial results.

In the last two months, Columbia Care has issued 3.22 million shares at C$9.00 and 16.15 million shares at C$8.05 to raise ~C$160 million.

The Green Leaf Medical deal involves a cash payment of $45.0 million and the issuance of 43.9 million shares to account for the $195.0 million portion of the transaction. Of course, those shares won't be in the balance until the deal closes in the expected Q3 timeline.

The share dilution is very appealing considering Green Leaf Medical was bought for 4.8x '21 adjusted EBITDA targets. The $240 million deal value suggests an impressive adjusted EBITDA target of $50 million. The complete revenue number isn't included in the 2021 guidance considering the closing date is sometime in Q3.

The company becomes a leader in Mid-Atlantic states such as Maryland, Pennsylvania and Virginia. Columbia Care will have scale in all these states awaiting recreational cannabis approvals in the next few years.

The Project Cannabis deal closed in December and cost the company $69 million. The deal had similar attractive multiples at only ~6.7x 2020 adjusted EBITDA.

Despite all of these positives, Columbia Care hasn't even seen the stock outperform other cannabis stocks. A big discrepancy still exists between how some of the Canadian LPs traded based on the excitement surround U.S. cannabis legalization that will benefit the U.S. MSOs far more. Tilray (TLRY) is still up 150% in the last three months compared to only 37% from Columbia Care while a larger MSO like Trulieve Cannabis (OTCQX:TCNNF) is up nearly 50%.

The stock trades with a market valuation of $2.25 billion now based on 307 million shares outstanding back in November and the additional shares issued for stock offerings and acquisitions. The amount includes up to 19 million warrants outstanding as of the end of Q3 that will come with a solid boost to the cash balance.

Once closed, the Green Leaf Medical deal will add another 43.9 million shares to the balance bringing the company to ~380 million shares outstanding, but the deal brings accretive adjusted EBITDA to the mix.

Takeaway

The key investor takeaway is that the stock trades at only 4x updated 2021 revenue guidance. The ability of the MSO to make acquisitions have added value to the stock generally inline with the recent rally.

Columbia Care remains an exceptionally cheap MSO positioned for recreational cannabis sales in key Mid-Atlantic states making the stock attractive to outside buyers once cannabis is federally permissible in the U.S.