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Trulieve Cannabis: A Top Pick Operator In A Small Pond? Analyst Offers Model Update Post 2Q22

The Analyst

Pablo Zuanic from Cantor Fitzgerald maintained a rating of Overweight for the stocks of Trulieve Cannabis Corp. TRUL TCNNF and lowered its price target to $54 from $57, on “slightly reduced estimates.”

The Thesis

In a recent analyst note, Zuanic explained why Trulieve is one of his Top Pick MSOs, albeit the market in the state is experiencing “little growth.”

Trulieve sales in the second quarter of 2022 were up 1% sequentially (v.s. Green Thumb [GTII GTBIF] +5%, Curaleaf [CURA CURLF] +8%, and Acreage [ACRGACRG, ACRHF, ACRDF] +9%). Zuanic explained the sales outlook was lowered for the year given “macro factors” and the “rationalization of the wholesale business.” 

However, he highlighted ‘renewed efforts of a rec ballot initiative in FL for Dec’24, and further evidence of the company’s franchise strength in FL (retaining $ share on stable menu pricing in a context of peer discounting; sales per store well above peers), are factors that make Trulieve “a top pick among MSOs.”

Highlights Of The First Quarter

  • Sales were up 0.6% sequentially to $320.2Mn.
  • Retail piece ($299Mn) was up 3%.
  • Net wholesale (only 7% of sales) was down 24% sequentially (partly on rationalization, macro, and competitive challenges in states like PA, MA, and AZ).
  • Adjusted gross margins dropped 90bp to 57.3%.
  • Adjusted EBITDA for the first half of 2022 was $217Mn.
  • Adjusted EBITDA margins were up 140bp to 34.6% on lower recurring SGA (29% vs. 30% in 1Q).
  • Operating cash flow for the first half of 2022 was -$10Mn and plus $64Mn ex working capital changes (inventory is up $58Mn YTD).
  • Net debt increased to $372Mn from $287Mn at the end of March, below large MSO peers.

Although Trulieve’s top line was mostly in line (0.4% below FactSet consensus), Zuanic is not surprised. The analyst noted that in the context of a growth industry, “flattish seq sales are not that impressive”.

“We estimate the company’s three core markets in $ were flat (FL) to down (Headset had AZ down 2% for 2Q seq, and we estimate PA was down low/mid-single digits). Trulieve held prices in FL during 1Q while menus dropped by 12% YTD, and average flower prices were >20% above the market average. Zuanic considered that outperforming the FL market in $, “says a lot about the company’s FL franchise.”

Outlook: Moving To ‘Wholesale,’ Lowering Sales Guidance

Due to macro challenges such as consumer purchasing power and wholesale rationalization (it exited NV wholesale in July; will move more of its own product to its stores in states that allow wholesale), Trulieve lowered its sales guidance for fiscal 2022 by 5-7%, to $1.25-1.30Bn. These sales numbers in the second half of 2022 would imply a Half on Half (financial comparative of results) drop of 4% to an increase of +4%.

Regarding the FactSet consensus, the implied sales guidance range of $611-661Mn is 5% to 13% below.

“Adjusted EBITDA guidance was reduced to $415-450Mn, from $450-500Mn; taking the mid-point, this implies an EBITDA margin of 33.9% vs. 35.2%. The company maintained the long-term targets of 60% adjusted gross margins and 40% adjusted EBITDA margins, Zuanic said. “Management is enthusiastic about newly organized efforts (well-funded, more focused, and wiser from prior attempts) to put rec legalization in the Nov’24 ballot. It also thinks the current landscape (macro challenges, lack of capital market access) will create attractive M&A opportunities.”

Valuation And Price Target

Taking current net debt of $372Mn, leases of $225Mn, tax liabilities of $262Mn, and eventual derivative inflow of +$24Mn, Zuanic arrived at an EV of $3.3Bn (taking the intraday share price of $13.07 on 8/10). “On our CY23 estimates, this means 2.5x sales (MSO avg is 2x) and 7.5x EBITDA (7.3x for the group); for CY22 the stock is valued at 2.6x sales (avg 2.6x) and 8.4x EBITDA (11.7x avg). Our approach yields a 12-month price target for Trulieve of $54 (vs. $57 before on lower estimates),” Zuanic concluded.

Photo By Worachat Sodsri en Unsplash. 

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