Headquartered in Quincy, Florida, Trulieve (TCNNF) is primarily a vertically integrated “seed-to-sale” company; it is the first and largest fully licensed medical cannabis company in Florida, explains Ryan Irvine, contributing editor to Internet Wealth Builder.

The firm recently released third quarter results. Overall, Trulieve results were ahead of expectations and highlighted by a strong adjusted EBITDA beat. Revenue increased 4% from the previous quarter and was up 64% from last year, powered by the acquisition of Keystone Shops in Pennsylvania. Organic performance was flat in a seasonally slow period for the company’s core Florida business.

Adjusted EBITDA improved 3% from the second quarter and was up 43% from 2020 with margins holding relatively firm sequentially at 44%. On a pro forma basis for the acquisition of Harvest Health & Recreation, third quarter revenue would be $316 million with $121 million of adjusted EBITDA (an approximate 38% margin).

During the quarter, each of 14 of the legacy Harvest stores in Florida were temporarily closed and relaunched under the Trulieve banner and have experienced a 35% improvement in run-rate revenue compared to pre-acquisition performance.

While comparable improvement across the balance of Harvest’s asset base is unlikely for a number of reasons (including Trulieve’s dominant brand recognition in the Florida market which is not present in other geographies currently), the swift integration of the Florida stores is nonetheless impressive and should contribute positively to strength in the fourth quarter.

Additionally, in the third quarter Trulieve executed a targeted pricing strategy, offering selective discounts to preserve margins and retain brand value in reaction to continued promotional activity by competitors in Florida.

These actions combined with improved inventory flow-through and the onboarding of incremental capacity across its markets drove about 150 basis points (bps) of quarter-over-quarter gross margins percentage expansion despite some offsets from higher third-party brand sales.

Operating efficiency held relatively steady, helping to maintain adjusted EBITDA at 44%. This was a positive given the fact Trulieve’s gross margin was down 260 bps to 67.2% and adjusted EBITDA margin was down 275 bps to 44.1% in the preceding period.

While margin pressure may continue, Trulieve’s core Florida business should continue to grow into 2022. If investors are patient, the company will add significant growth momentum via the Harvest acquisition.

Based on the combined entities 2021 adjusted EBITDA guidance of $461 million, Trulieve is trading at approximately 12.27 times forward EBITDA.

If the company can meet management’s fiscal 2021 adjusted EBITDA guidance of $461 million, and trade with a justified EV/EBITDA multiple of just 16.5 times, we estimate fair value for the stock over the mid-term to be between C$52-$55 per share. Peer Multi-State-Operators (MSO) trade at significantly higher multiples.

Investments in the emerging cannabis space are for risk tolerant investors. As such, investors should expect above average volatility. We reiterate our Speculative Buy recommendation on the shares.

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