Acreage Holdings: Significant Arbitrage Opportunity If US Legalizes Says Analyst

Vertically integrated cannabis company Acreage Holdings, Inc.ACRDF reported its unaudited financial results Wednesday for the third quarter of 2021, revealing a consolidated revenue of $48.2 million, representing an increase of 52% year-over-year and 9% sequentially.

"At the beginning of fiscal 2021, we introduced a refreshed strategy focused on our key priorities, which include delivering improved financial results and generating shareholder value," Peter Caldini, the company's CEO said.

The Analyst

In his latest note, Cantor Fitzgerald's analyst Pablo Zuanic said that under Caldini’s management, Acreage became a more disciplined and focused operation; focused on “improving profit margins”, and “accelerating growth in Acreage’s core markets”.

Cantor remains Neutral with no changes in their price target for ACRDF at $1.92 per share.

The Thesis

The analyst noted that gross margins fell 460bps seq (to ~49%) partly due to supply issues in NJ and the ramp-up of new facilities (edibles in MA). Sales including MSA revenues (combined revenues, i.e., the sum of consolidated sales and MSAs) grew by 5% seq to $64.2 million. At the regional level, the company says it is #1 in the CT, ME, and Ohio markets, and is a Top 3 player in New Jersey.

In addition, consolidated gross margins fell from 54% in 2Q to 49.4% in 3Q, and EBITDA margins fell from 18% to 13%. A cash flow statement was not provided yet. The firm ended 3Q with net debt of $114 million (manageable, at about 0.4x annualized sales).

Zuanic noted that the company is completing capacity expansions in New Jersey and New York, and “it should be well-placed to benefit as states in the east go rec; all this, plus continued cost efficiencies, should lead to higher margins."

He continued, “We realize this stock is more tied to the share price of Canopy Growth (WEED.TO/N) than fundamentals, but we note the floating shares trade at a >70% discount to the minimum price (US$1.75 vs. US$6.41). The upside on the floating shares would be near 4x if the contingent offer were executed today (it is contingent on MJ federal permissibility).”

However, despite the arbitrage, Zuanic remains Neutral on the stock “given the uncertainty on the timing of the triggering event, and sustains that “the odds could improve quickly if Republicans and Democrats can agree on a reform package this term”.

Outlook

According to Cantor, Acreage’s more-focused strategy and operating leverage should allow for continued margin expansion. By 4Q, it should benefit from ongoing cultivation expansion in MA, plus the full benefit of the recent expansion in PA (capacity up 20%) and IL (80K sq ft now), and ongoing expansion in NJ/NY. These expansions are indoor facilities for high-quality flowers.

Regarding the balance sheet, Zuanic noted that “it might sell the MI operation and it can refinance the debt or take on more debt, but it has no plans to issue equity. The growth will be mainly organic, but M&A could be used to add more depth to the existing footprint (for example, add retail in PA where now only wholesale; add more retail in CT). Accounting-wise, OH will shift from MSA to being consolidated from 10/1; so, the only MSAs next year would be part of ME (med) ad NH,” concluded Zuanic.

Price Action:

Acreage stocks were trading 0.48% lower at $2.04 per share, at the time of writing, after the bell, Thursday night.

Image By Ilona Szentivanyi