Welcome to our Cannabis Earnings series where we break down the latest earnings to help you focus on the most important topics.
Columbia Care (OTCPK:CCHWF) is a relatively low-key participant in the U.S. cannabis scene. The company trades on the NEO exchange, unlike most of its peers that chose to list on the popular CSE. With its latest acquisition in Colorado, the company is adding another mature market to its collection of assets. However, the company still has smaller revenue and lower margin compared to MSO peers mainly due to its lack of scale in many states. We think the key to its future success would be to concentrate on scaling up in select markets in order to improve profitability. We are Neutral on Columbia Care until it could prove its ability to reach profitability.
2019 Q3 Review
Columbia Care reported 2019 Q3 results which saw revenue growing 15% to $22 million. Gross margin declined further to 24% which is below most MSO peers. Although revenue has been growing, the downward trend in gross margin is concerning. According to management, Q3 gross margin weakness was linked to subsidiaries not yet growing or selling and impact from the vaping ban in MA. Although margin pressure has been common as part of the growing pains for high-growth cannabis companies, the trend has been concerning. Given Columbia Care’s smaller scale in many of the markets it operates in, we are not surprised that its margin was lower. The company remains unprofitable as adjusted EBITDA was a negative $11 million.
(Source: Public Filings)
Columbia Care has a large footprint but its assets are thinly spread out across these markets. It has one dispensary in many markets which holds limited value in the eyes of sophisticated investors. The more valuable assets are its licenses in New York, Florida, Massachusetts, Pennsylvania, and Illinois. The company began adult-use sales in its only dispensary and has seen robust initial demand. However, we think the company needs to deepen its footprint in key markets in order to drive higher sales and efficiencies. One of the most successful cannabis companies financially has been Trulieve (otcpk:TCNNF) partially because it achieved high market share and superior margins through its concentrated operations in Florida.
(Source: IR Deck)
In November 2019, Columbia Care announced the acquisition of The Green Solution for $140 million, which it said was the largest vertically integrated operator in Colorado. The acquisition will add 21 operating dispensaries to Columbia Care’s footprint with two more under development. The target generated over $73 million of sales for the last twelve months ended on September 30, 2019. The deal is financed with $110 million in stock, $15 million in secured debt, and $15 million via seller’s note. The purchase price for a mature asset like TGS appears to be reasonable and should help improve the profitability at Columbia Care. The Colorado market generated $1.6 billion in total sales in 2019 through November and it is a more mature market after growing at only 2.5% in 2018. The lower purchase price multiple reflects the growth profile of the Colorado market.
(Source: IR Deck)
Columbia Care also expanded its presence in Ohio after CannAscend won approval to open 4 medical dispensaries. Columbia Care holds an option to acquire CannAscend. It also received an adult-use license in Illinois where it currently has one location open. The company is planning to open a second location in Illinois. Furthermore, it received one of the 14 licenses issued by Utah to operate a medical dispensary there. Lastly, the company opened two more locations in Florida and has plans for a total of 22 locations. As we said in our initiating report, Florida remains the largest addressable market for Columbia Care given its ability to reach scale. In other markets such as Illinois and Utah, the company is limited by the number of locations it is allowed to open, potentially limiting its efficiency and profitability.
Financials and Valuation
Columbia Care has a market cap of ~$750 million and trades at an EV/Sales of ~7.5x which is on the high end relative to other second-tier MSO peers. For reference, Acreage (OTCQX:ACRGF) trades at 9.1x (less meaningful given its pending acquisition by Canopy Growth), MedMen (OTCQB:MMNFF) trades at 2.6x, iAnthus (OTCQX:ITHUF) trades at 3.4x, and Ayr Strategies (OTCQX:AYRSF) trades at 2.0x. Columbia Care’s premium over other peers can be ascribed to its bigger footprint and better-capitalized balance sheet. We expect the TGS acquisition to moderate its valuation multiple given the purchase price of ~2.0x sales.
Cash balance declined by $40 million to $85 million during Q3. With the Florida footprint still in its infancy, we expect capital expenditures to remain high over the next few quarters. In December, the company announced a sales-and-leaseback of 6 retail and cultivation facilities for $35 million and it said more sales could be coming soon. With $120 million of pro forma cash, Columbia Care is well-positioned to compete in the competitive U.S. market. We don’t foresee any dilutive capital raise required in the near-term.
We remain Neutral on the stock mainly because the company has lower margins and more work to do to reach profitability. Florida is the largest potential market where it has a meaningful runway for expansion but competition is heating up there. The company acquired TGS to add a mature asset with meaningful revenue but Colorado’s growth profile is relatively unattractive. We think Columbia Care has a lot of work to do before it could achieve scale and profitability over the long term. Meanwhile, the stock is richly valued which limits its near-term upside.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.