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

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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.”

Verano’s Strategy And Footprint

Verano Holdings Corp. operates in 13 states, including recent recreational states like New Jersey, Connecticut, and Maryland. With a significant retail presence consisting of 135 stores and 1.1 million square feet of cultivation capacity, the company has established a strong foothold in the industry. Verano’s recent transition to listing on the Cboe Canada from the CSE is expected to boost liquidity and attract institutional investors.

Verano’s expansive footprint covers 13 states, with a total addressable market (TAM) estimated at approximately $13.5 billion. This market is projected to grow to $17.7 billion by 2025, representing a cumulative growth rate of 32% for the period from 2022 to 2025.

Among the states where Verano operates, Illinois, Florida, Pennsylvania, and New Jersey contribute to nearly 70% of the company’s sales. Verano holds the largest number of stores in Illinois, operates 17 stores in Pennsylvania, boasts the second-largest chain in Florida, and has achieved market leadership in New Jersey with a 20% CPG brand share.

Verano’s Current Footprint and Brand Portfolio

Verano operates in 13 states, with a robust retail presence of 135 stores and 1.1 million square feet of cultivation capacity.

The company leverages its substantial total addressable market of $13.5 billion, which is expected to grow to $17.7 billion by 2025. Recent transitions to recreational use in states like New Jersey, Connecticut, and Maryland, as well as potential shifts in medical states such as Florida, Ohio, and Pennsylvania, position Verano for further growth.

Moreover, Verano has established a strong franchise presence, with 82% of sales coming from retail and 18% from net wholesale.

Verano’s Financial Metrics: Profitability, Balance Sheet, And Cash Flow

Verano distinguishes itself with its strong free cash flow generation, outperforming the other 20 Multi-State Operators (MSOs) reviewed. It ranks fourth among the 20 MSOs in terms of sales, with impressive profitability metrics, including gross margins and adjusted EBITDA margins that exceed industry averages.

Zuanic highlights Verano’s solid balance sheet, which demonstrates a low net debt-to-sales ratio. While the total debt load is manageable, it is not exceptionally low.

Key highlights of Verano’s financial performance include:

  1. Low debt leverage, with net debt at only 0.4x sales, positioning Verano in the bottom quartile of MSOs.
  2. Strong EBITDA to Operating Cash Flow (OCF) conversion, ranking among the top four performers.
  3. Highest Free Cash Flow (FCF) among MSOs in the last 12 months (L12M).
  4. EBITDA margins consistently exceeding 33% in the L12M, ranking among the top two 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 has the potential to expand its retail footprint by partnering with social equity licensees, creating new wholesale opportunities. Despite its medical markets approaching maturity and facing competitive pressures, Verano is well-positioned to achieve earnings growth that outperforms larger peers.

Considering Verano’s impressive financial performance and growth potential, Zuanic believes the stock is undervalued compared to its peers. Currently trading at a 17% discount based on a 1-year forward EBITDA multiple of 4.4x, the stock presents an attractive investment opportunity.

Photo by Annie Spratt on Unsplash.

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