Trulieve Cannabis Corp. (CSE:TRUL) has held onto its ‘Buy’ ratings from analysts at Canaccord Genuity and Stifel GMP although both brokerages have reduced their price targets after the medical cannabis company produced fourth-quarter 2022 results and provided 2023 guidance that were below expectations.
Canaccord’s analysts said revenue of $302 million came in below its $311 million estimate and consensus of $306 million. Further, adjusted underlying earnings (EBITDA) of $85 million was below its $95 million forecast and consensus estimates of $98 million.
“From Q3/22, though basket sizes decreased by 3%, traffic increased by 5%, with the company witnessing strength in its premium products,” the Canaccord analysts wrote in a note to clients. “Adjusted EBITDA of $85 million represented a margin of 28% and reflected the impact from the company’s previously telegraphed ramp down of idle assets and inventory streamlining, which was down 4% from Q3/22, as it looks to focus on cash flow generation.”
The Stifel analysts noted that the earnings miss was mainly due to competition, customers trading down from mid-tier to value, limited wholesale opportunities and a longer time for JeffCo to lower production costs than previously anticipated.
They also noted Trulieve guided its first quarter 2023 revenue expectations slightly down quarter-over-quarter driven by wholesale.
“Of greatest focus is TRUL's 2023e OCF (operating cash flow) guidance of $100m, in our view, which includes a Q4/22 deferred tax payment ~$50m current account),” the Stifel analysts wrote. “In addition, we estimate inventory wind-down could produce a ~$50m order of magnitude benefit as we believe current levels are roughly double management's two-to-three months' target while finished goods stand at ~$50m with a potentially equivalent monetization from WIP. Hence, this could fully offset the extra tax payment, resulting in a true OCF level of ~$100m, still a large re-rating from 2022's ~$25m level.”
Reducing its price target to C$25 from C$34, Stifel said the lower target stems from its lower forecasts as it integrates the 4Q 2022 results and 2023 guidance.
Margins should fare modestly better
While Trulieve expects first quarter 2023 revenue to be down sequentially, the Canaccord analysts noted that margins should fare modestly better than the previous quarter given the period had several one-time headwinds.
On a full-year basis, they said Trulieve expects to add another 15-20 dispensaries to its store count and expects capex to come in 50% lower than the prior year.
While reiterating its ‘Buy’ rating, the Canaccord analysts lowered its target price to $40, from $44 previously, representing 14.6 times its 2023 EBITDA estimate of $403 million, which they convert to Canadian dollars to account for the company’s CSE-listed shares. They also lowered its estimates for the front half of 2023 and have modestly adjusted their multiple, given the still challenging inflationary and consumer spending environment.
“Given Trulieve’s healthy financial position, access to capital, and best-in-class profitability metrics, we believe the stock is attractive for investors looking for cannabis exposure to a high-quality operator with a proven ability to generate strong EBITDA and profitability,” the Canaccord analysts said. “With Trulieve currently trading at 4.0x our 2023 EBITDA estimate and given Trulieve’s dominant and growing position in the attractive Florida market and exposure to the high-growth Pennsylvania and Arizona markets, we believe the shares are undervalued at current levels.”
Canaccord’s shares traded at C$8.52 early Thursday afternoon.
Contact the author at stephen.gunnion@proactiveinvestors.com