The U.S. cannabis MSOs (multi-state operators) remain under pressure due to short-term regulatory issues causing delayed financial boosts. Ayr Wellness (OTCQX:AYRWF) is a prime example of an MSO awaiting the next leg higher as regulators stumble along. My investment thesis remains ultra Bullish on this low EBITDA multiple stock.
Ayr Wellness reported Q4’21 revenues grew 16% sequentially to reach $111.8 million. While this revenue boost was positive, adjusted EBITDA totals were sequentially flat at $26.1 million due to regulatory delays requiring a level of higher spending without the corresponding revenues in the short term.
The major issue is that certain regulatory developments are completely pushing out 1H’22 expectations. Ayr Wellness had guided to 2022 revenues of $800 million with adjusted EBITDA of at least $250 million and operating income hitting $100 million. The new guidance is for the MSO to end the year with an annulled run rate matching those figures. In essence, the Q4’22 results would equate to revenues of $200 million and EBITDA of $62.5 million. The EBITDA guidance amounts to 140% growth on top of already sizable numbers to end 2021.
The key regulatory issues are as follows:
- Massachusetts – Boylston Street and Watertown adult-use dispensaries completed with expected approval now in Q2.
- Massachusetts – cultivation expansion now expecting sales to begin in Q4.
- New Jersey – three dispensaries awaiting adult-use sales approval with expected start in Q2.
- New Jersey – cultivation expansion of 75,000 sq. ft. completed.
Ayr Wellness provided the following table highlighting 70% of the EBITDA gains this year come from both cultivation expansion in the above states and adult-use activations in the same states with a primary focus on New Jersey.
The Florida market continues to provide additional upside with a 15% boost in revenues going from the $448 million run rate in Q4’21 suggesting the state market will generate another $67 million in sales this year and a 10% boost to total EBITDA. Trulieve Cannabis (OTCQX:TCNNF) dominates the Florida market, but Ayr Wellness has recently taken share with the second-largest position store base having recently opened the 45th store.
The latest estimates have the New Jersey recreational cannabis market opening up at the end of April. The above major EBITDA boost doesn’t even factor in full benefits from the new stores and cultivation assets in Massachusetts and New Jersey this year with the earliest benefit being just half a year of sales.
Along with completed capacity in Arizona during Q4’21 and more capacity in Florida, Ayr Wellness forecasts capacity growing from only 94K pounds of cannabis biomass to 275K by the end of 2022. The MSO will achieve nearly 200% capacity growth in another sign of why the forecasted growth is only steps away.
The path to much higher revenues begins in mid-2022 and runs far into 2023. The market is disappointed with the cut guidance for 2022, but Ayr Wellness has the assets in place to reach the goal of at least $250 million in annual EBITDA. For these reasons, analysts are forecasting 2023 revenues top $900 million.
The stock has a market cap of $850 million with over $200 million in net debt. Naturally, a cannabis company with sales forecast to reach the current market cap leaves the stock exceptionally cheap.
Based on an EV of $1,050 million, the stock trades at just 4x the above end-of-year EBITDA run rates. Investors will be hard-pressed to find a stock in another industry with forecasted EBITDA growth of nearly 150% while the stock only trades at 4x those targets. Most industries trade far closer to the growth rates.
The key investor takeaway is that Ayr Wellness is far too cheap trading at only $12. While regulatory delays are common in the cannabis industry and the MSO isn’t necessarily guaranteed to obtain the expected approvals, the risk of the company not hitting these targets remains relatively low.
Investors should use the weakness in the sector as an opportunity to play the long-term tailwinds of the additional adult-use market launches and federal approval while the MSO stock is cheap.
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