Investment Highlights:
• The profitability leader: The company's dominant positioning in Florida, one of the most attractive cannabis markets in the US, allowed Trulieve to continue generating industry-leading EBITDA margins, despite being notably active on the acquisition front. While the entry into new states such as Pennsylvania and Arizona is likely to lower the margin profile modestly overall in 2022, given the wholesale component within these states, we believe Trulieve will remain the profitability leader within the space.
• A bigger, better MSO heading into 2022: Following the acquisition of Harvest Health and Wellness in Q4/21, Trulieve cemented itself as the largest player in the cannabis market in terms of dispensary count and cultivation footprint. Importantly, the addition of leading market share positions in Arizona, a state which transitioned to an adult-use market in 2021, and Pennsylvania, a highly attractive medical market, has positioned the company with leading market shares in some of the best states in the US. We believe the company may also look to go deeper within its current state footprint during 2022, through some tuck-in acquisition activity.
• Healthy financial position: At the end of Q3/21, Trulieve had a cash balance of $214 million, and subsequent to quarter end, completed a $350 million private placement of senior secured notes, leaving the company with what we estimate to be a pro forma cash balance of $275 million. We believe this leaves Trulieve well- funded to accelerate growth within its existing markets through the roll-out of new dispensaries and incremental cultivation facilities, while providing the company optionality to pursue potential bolt-on M&A.
• Macro trends support Trulieve’s M&A strategy: Looking at the sector from a top-down perspective, we believe there is increasing pressure on states to legalize cannabis, either medically or by transitioning medical markets to adult-use over the medium term. With these potential tailwinds, we believe Trulieve is well positioned for growth given two of its core markets, Florida and Pennsylvania, are currently medical-only states with strong potential to transition to adult-use over the course of our forecast period. In light of Trulieve’s leadership position within these states, we believe the company is well positioned to capitalize on increased demand for cannabis if/when this transition occurs.
Valuation
We are reiterating our BUY rating and $97.00 target price. Our target represents 22.4x our 2022 EBITDA estimate of $645 million, which we convert to Canadian dollars to account for the company’s CSE-listed shares. With Trulieve currently trading at ~8x our 2022 EBITDA estimate, and given Trulieve’s dominant and growing position in
the attractive Florida market, and exposure to the high-growth Pennsylvania and Massachusetts markets, we believe the shares are undervalued at current levels.