Analyst: AYR Wellness Weakness on Guidance Overlooks Longer-Term Opportunity

On Monday, AYR Wellness AYRWF reported its financial results Monday for the three and nine months ended September 30, 2021, revealing a 111% year-over-year and 5% sequential increase in revenue, which amounted to $96.2 million and an adjusted EBITDA of $26 million. 

The Analyst

Jonathan DeCourcey, director of equity research at Viridian Capital Advisors, a leading financial advisory firm in the legal cannabis industry, revised its forecasts and maintained a price target of $42 and a rating of "Buy," for AYR, reflecting an EV/EBITDA multiple of 11.6x their 2022 estimates.

The Thesis

“We expect AYR’s stock to be pressured on disappointing guidance for the fourth quarter of 2021 and a modest cut to margin expectations in 2022. In our view, we believe any negativity overlooks the favorable opportunity ahead and we would buy on weakness given our continued belief that AYR will ultimately be a winner in US cannabis”, noted DeCourcey, in his Nov. 22 analyst note.

“We remain confident that execution of ongoing expansion initiatives will translate to outperforming growth and that the company’s current and legacy discounted valuation relative to other large MSOs will finally be eroded driving upsized returns for investors long term,” he added.

Estimated revenues for the fourth quarter of 2021 were tempered by Viridian, from $120 million to $106 million; from $369.6 million to $351.8 million for the year 2021; and from $760 million to $800 million (estimated) for the year 2022.

The estimated Adjusted EBITDA for the fourth quarter of 2021 was also changed. It went from $43.7 million to $26.5 million.

DeCourcey expressed his concerns over guidance and considered that AYR management’s “aggressive approach to M&A and recent capital raising, it is far more likely that meaningful acquisitions will be announced that drive significant upside to guided targets. AYR’s ’21 Liberty acquisition (in Florida) represents a blueprint for anticipated acquisitions.”

Expanding Retail Presence in IL (And Expect Additional M&A to Come)

In addition to earnings, AYR management’s announced the acquisition of Dispensary 33, a vertically-integrated Illinois operator with two Chicago dispensaries. AYR will pay $55 million ($12 million in cash, $3 million in sellers notes, and $40 million in stocks).

The acquisition follows this summer’s announced acquisition of Herbal Remedies and its two stores in Illinois. Viridian expects both transactions to close in early 2022 and operations to contribute meaningfully next year for Illinois.

“Given, management’s recent focus on acquiring assets and the company’s recent capital raise activity we are confident that additional acquisitions are looming and we anticipate an expansion in both existing markets (particularly in Ohio) and entry into new markets is likely,” DeCourcey explained.

“Any expansion through M&A will be incremental to the numerous ongoing expansion initiatives across existing markets(including both ongoing cultivation and retail expansion in Arizona, Florida, Massachusetts, Nevada, Pennsylvania and cultivation and production expansion in Illinois and Ohio),” the analyst concluded.

Image By Ilona Szentivanyi