AYR Wellness: Management Expects 'Significant Sales' And 'EBITDA Ramp' In 2022

The Analyst

Pablo Zuanic from Cantor Fitzgerald kept a rating of "Neutral" on Ayr Wellness Inc. AYRWF stocks and lowered its 12-month price target to $6.75 from $13.30, due to reduced estimates and overall sectoral derating.

The Thesis

AYR reported stable sequential sales growth, though EBITDA margins dropped 6 points quarter-to-quarter. “However, management expects a sales and margin ramp in the back half of 2022, as it begins rec sales in NJ/MA and expands across its footprint,” Zuanic said in a May 26 analyst note.

“The stock trades at a peer discount, but we think this is justified on above-average debt leverage (1.8x sales, taking a broad definition), stock-based compensation (9% of sales in the first quarter of 2022), and execution risk,” the analyst said.

“Given sector volatility and depressed sectoral valuations (...), we take a lower-risk approach and prefer companies with above-average breadth/depth, more established operations, stronger balance sheets, and less execution risk. In that context, we rate AYR Neutral,” Zuanic concluded.

About The First Quarter

Sales of $111.2 million were flat sequentially, with management noting it held or gained share in its key markets such as Nevada; where same-store sales were up 5%, and Florida where total company wholesale sales were up 5%.

“When we calculate in the fourth quarter of 2021 sales results, five states accounted for close to 95% of sales (in this order: NV, FL, MA, PA, AZ), with an estimated market-weighted sequential blended drop of 1.6% for those markets. What the company calls adjusted cash gross margin decreased to 52% from 57%, mainly due to price pressures in the wholesale market, with adjusted EBITDA margin down 600bp sequentially to 17.5% (taking into account “start-up cost” and “other”), EBITDA margin would have been ~13%),” Zuanic said.

Ayr’s financial net debt (including interest accrued) was $353 million, “or 0.8x the current annualized sales run rate.” Zuanic explained that if net debt calculations include income tax payables, deferred income taxes, earn-outs (booked as contingent considerations), and leases, net debt adds up to $690 million, or 1.6x sales (9x current annualized adjusted EBITDA).

“Regarding cash flow trends in the first quarter of 2022, management said that this year's capex will be front-loaded (with 1Q capex of $33 million equivalent to about half of the full-year plan) and it noted it also accumulated inventory in the first quarter for the start of rec sales in New Jersey,” Zuanic wrote. “Still, a negative FCF of $54 million in the first quarter compares with a negative FCF of $128 million for all of 2021. All this said management is pointing to the earnings power the company expects to unlock in the second half of 2022.”

Guidance For 2022

Ayr’s management keeps its guidance for the fourth quarter of 2022: $200 million in sales and $62.5 million in EBITDA (or >31% of sales).

“The targeted sales pace for the fourth quarter implies a 1.8x ramp up vs. the first quarter, and EBITDA margins nearly doubling (from 17.5% in the first quarter of 2022),” Zuanic concluded. “As per today’s conference call and MD&A filed, there are several levers (especially in NJ and MA) that should also help margins (greater scale, enhanced vertical integration, and improved quality should lead to better prices/mix).”

Image By Ilona Szentivanyi.