Cantor Fitzgerald Lowers Price On Trulieve Cannabis Corp Ahead Of Q2 Report, Still Among Top US Picks

On Thursday, Trulieve Cannabis Corp. TRUL TCNNF introduced a comprehensive brand portfolio, including four distinct brands - Muse, Sweet Talk and Momenta brands and the expansion of the Cultivar Collection - to serve the consumer in both adult-use and medical markets.

The news came ahead of its second-quarter earnings report scheduled to be released after the close on Thursday, August 12, and in anticipation of closing a $2.1 billion deal to merge with Harvest Health & Recreation Inc. HARV HRVSF.

The combined company is expected to generate revenue of $1.2 billion in 2021, having operations in 11 states, including a total cultivation and processing capacity of 3.1 million square feet spread across 22 facilities, as well as 126 retail locations selling both medical and recreational cannabis.

As the multistate operator faced competition in Florida in 2021, from companies like Surterra Wellness, Curaleaf Holdings Inc. CURA CURLF, AltMed Florida and Liberty Health Sciences Inc. LHS LHSIF, its stock dipped by 3.44% year-to-date after seeing a significant growth trajectory over the last few years.

The Analyst

Cantor Fitzgerald's Pablo Zuanic stayed Overweight on Trulieve stock, lowering the price target to $56 from $71.

"We would not make a big deal of our price target cut, as we have just moved to a more consistent approach across companies, using short-term 12-month price targets and not factoring DCF or long-term rec optionality," the analyst explained.

Trulieve/Harvest Merger

Zuanic said that the merger with Harvest will position Trulieve as a leader in Florida, Arizona, and Pennsylvania, in addition to having a "relevant presence" in several other states such as Georgia where it recently gained a license.

By the end of the year, the newly formed company is expected to operate 21 stores in Pennsylvania, 98 stores in Florida - accounting for 28% of the state's total stores - and potentially end up with 25% of the state's stores in Arizona.

"The company should be a top holding in any portfolio of cannabis stocks," Zuanic said, reaffirming his recently disclosed opinion on top pics among the U.S. cannabis stocks.

"We project revenues north of $2.7Bn by 2025, even assuming PA/FL remain medical markets only," he added.

The multistate operator reported recently that the 30-day waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection with the previously announced proposed acquisition of Harvest has expired and that it is a step closer to wrapping up the merger.

"The main steps now are with state-level regulators," Zuanic said. "We model the transaction as closing on 1/1/22."

Zuanic estimates that the revenue mix upon the merger's closing will be "70/30 Trulieve/Harvest," with some margin dilution.

"We continue to believe a piecemeal approach (acquiring a collection of assets over time) could have been more cost-efficient for Trulieve (although not time effective), as it sought to enter new states or add depth in existing states," Zuanic noted.

Ahead Of Q2 Earnings Report

With FactSet assuming an 8% sequential increase for the second quarter, to $209 million in sales, the analyst said he thinks "there could be a meaningful upside to those numbers, if at least price/mix held in Florida."

Zuanic projects for second-quarter sales to hit $223 million - up 15% sequentially, compared to FactSet consensus of 8% - including $196 million coming from Florida, $20 million from Pennsylvania and the remaining $7 million from Connecticut, Massachusetts and California.

Adjusted EBITDA will amount to $101.8 million in the second quarter, as per Zuanic, accounting for 45.7% of sales.

"We expect Trulieve to continue to add assets (both depth and breadth) in organic terms (via license wins, say, NJ/VA?) and M&A," Zuanic concluded.

Price Action

Trulieve's shares were trading 4.76% higher at $33 per share at pre-market hours Friday morning.

Photo: Courtesy of Nicholas Cappello on Unsplash