Verano Holdings' 13-State Cannabis Footprint & Solid Balance Sheet Is Undervalued, Expert Explains

Equity research firm Zuanic & Associates, led by senior analyst Pablo Zuanic, has initiated coverage of cannabis company Verano Holdings Corp.VRNOF with an Overweight rating. Verano is the 3rd largest Multi-State Operator (MSO) by EBITDA and the 4th largest by sales in the cannabis industry.

“The current MSO average of 5.3x 1-year forward EV/EBITDA seems out of place in a market that has the potential to grow tenfold by 2030 in a bullish scenario or at least double by 2027 (...) In the absence of regulatory changes such as SAFER, we seek out undervalued stocks with above-average EBITDA per share growth potential,” Zuanic wrote.

“Verano meets both of these criteria. We believe the stock's valuation discount, currently at 17% on a 1-year forward EBITDA basis at 4.4x, is unjustified given the company's outstanding metrics in terms of profitability, cash flow, balance sheet strength, promising growth trends in recent performance and future prospects, and its significant market presence."

Strategy And Footprint

The company operates in 13 states, including recent recreational states like New Jersey, Connecticut, and Maryland. It boasts a significant retail presence with 135 stores and 1.1 million square feet of cultivation capacity. The recent switch of its listing to the Cboe Canada from the CSE is expected to improve liquidity and institutional ownership.

Verano's footprint covers 13 states with a total addressable market (TAM) of approximately $13.5 billion, which is projected to grow to $17.7 billion by 2025, indicating a 32% cumulative growth for 2022-2025.

Four states, including Illinois, Florida, Pennsylvania and New Jersey contribute to nearly 70% of the company's sales. It holds the maximum number of stores in Illinois, 17 stores in Pennsylvania, has the second-largest chain in Florida, and claims market leadership in New Jersey with a 20% CPG brand share.

Current Footprint and Brand Portfolio

Verano operates in 13 states with 135 stores and 1.1 million square feet of cultivation capacity.

A substantial total addressable market of $13.5 billion is poised to grow to $17.7 billion by 2025, with recent transitions to recreational use in states like New Jersey, Connecticut, and Maryland, and potential shifts in medical states like Florida, Ohio, and Pennsylvania.

In addition, Verano exhibits a strong franchise presence, with 82% of sales from retail and 18% from net wholesale.

Financial Metrics: Profitability, Balance Sheet And Cash Flow

Verano stands out for its strong free cash flow generation, recording the highest absolute free cash flow among the 20 MSOs reviewed.

Furthermore, Verano ranks 4th among 20 MSOs in terms of sales, with strong profitability metrics, including gross margins and adjusted EBITDA margins exceeding industry averages.

Zuanic noted the company maintains a solid balance sheet, with a low net debt-to-sales ratio, although its total debt load is manageable but not exceptionally low.

Highlights include:

1. Low debt leverage, with net debt at only 0.4x sales, positioning it in the bottom quartile of MSOs.
2. EBITDA to Operating Cash Flow (OCF) conversion, ranking among the top four performers.
3. Generating the highest Free Cash Flow (FCF) among MSOs in the last 12 months (L12M).
4. EBITDA margins have exceeded 33% in the L12M, ranking among the top 2 in the industry, reflecting disciplined execution and strong economics in Verano's core states.

Verano’s Outlook, Valuation, and Growth Potential

According to Zuanic, Verano's leading EBITDA margins of 33% are expected to drive earnings growth, primarily through top-line growth. The analyst’s future projections assume that Ohio will commence recreational sales by January 2025, while Florida and Pennsylvania will remain medical markets.

The company might also expand its retail footprint by partnering with social equity licensees, which could create new wholesale opportunities. Despite some of its medical markets nearing maturity and facing competitive pressures, Verano could outperform larger peers in terms of earnings growth.

For Zuanic the stock's valuation is considered undervalued compared to peers, with a 17% discount based on a 1-year forward EBITDA multiple of 4.4x.

Photo by Annie Spratt on Unsplash.