Cantor Lowers Price Target On Trulieve Post Harvest Merger Projecting Disrupted Near-Term Performance

Trulieve Cannabis Corp (OTCQX: TCNNF) confirmed Friday that it had

completed its previously announced billion-dollar merger with Harvest Health & Recreation Inc. (OTCQX: HRVSF), creating “the largest and most profitable cannabis operation in the U.S.”

The merged company is expected to generate revenue of $1.2 billion in 2021.

Under the deal, Trulieve acquired all of the issued and outstanding subordinate voting shares, multiple voting shares and super-voting shares of Harvest. The holders of Harvest shares obtained 0.1170 of a subordinate voting share of Trulieve for each subordinate voting share of Harvest held.

Trulieve issued a total of 50.9 million shares in connection with the transaction in exchange for all of the issued and outstanding Harvest shares.

The combined company will operate a retail network of 149 dispensaries across 11 states and three strategic regional hubs, with market-leading positions in Arizona, Florida and Pennsylvania.

The Analyst 

Cantor Fitzgerald’s Pablo Zuanic kept an “Overweight” rating on Trulieve’s stock but lowered the price target to $77 from $81. 

The Thesis

The merger came in three months earlier than expected pushing for an updated model on the stock, with Zuanic lowering the price target due to the slightly lowered pro forma estimates in the following few quarters. 

While the stock still carries a considerable upside, its new guidance scheduled for March, temporary store closings for rebranding in the fourth quarter and other common integration activities will probably limit its near-term upside, Zuanic said in his Monday analyst note. 

“Based on the company’s status as the number 1 US multi-state operator (on pro forma sales and EBITDA for 2Q21, store count, and cultivation), and leadership in key states like Arizona, Florida, and Pennsylvania (two states with recreational optionality), we would expect the 4-6pt discount on full year 2022 EBITDA (Trulieve 9x) to peers like Curaleaf (OTCQX: CURLF) at 15x and Green Thumb (OTCQX: GTBIF) at 13x, to narrow.”

Furthermore, the analyst modeled Trulieve’s Florida gross margins much higher than the multi-state operators’ average. 

According to Zuanic, the integration-related distribution could last through the second quarter of 2022, affecting even the numbers for the first half of 2022, adding that with both companies concentrating on completing the merger they may have disrupted their third-quarter performance. 

“In total, our new sales estimate for 2022 for the new company is now $1.51 billion vs. $1.6 billion before. Our EBITDA margin estimate for FY22 is now 35.8% ($540Mn) vs. 36.9% before ($590Mn),” Zuanic concluded.

The Price Action 

Trulieve’s shares closed Friday's market session 3.05% higher at $27.73 per share. 

Photo: Courtesy of Esteban Lopez on Unsplash