Ayr Wellness Inc C.AYR.A

articlevby seeking alpha: AYE IS DOING VERY WELL

[Humanist]

Ayr Wellness: Doing Very Well

Jun. 07, 2021 6:23 PM ETAyr Wellness Inc. (AYRWF)

https://seekingalpha.com/article/4433548-ayr-wellness-doing-very-well?utm_source=quotemedia.com&utm_medium=referral

Summary

• Ayr Wellness forecast revenues soaring over 54% sequentially to $90 million.
• The small MSO will quickly rival the size of global cannabis stocks with market valuations in excess of $10 billion.
• The stock trades at only 7x EV/2022 EBITDA target of $300 million.
• This idea was discussed in more depth with members of my private investing community, Out Fox The Street. Learn More »

 
The cannabis space has taken a pause since a big rally that peaked in February based on the election of Joe Biden in the U.S Presidential election. With or without the Democrats now in charge pushing for federal legalization of cannabis, Ayr Wellness (OTCQX:AYRWF) continues to benefit by a slow approval process leaving most firms stuck on the sidelines. My investment thesis remains very bullish on the stock trading around $30 and valued at about half the EBITDA multiples of the sector.

Next Step Up
Over the course of a few months, some MSOs (multi-state operators) like Ayr Wellness have become far bigger companies. The U.S. cannabis market continues to grow by leaps and bounds and the better operators have been able to acquire underperforming businesses for a cheap boost to sales going forward.

For Q1, Ayr Wellness reported revenues surged 74% to $58.4 million. CEO Jonathan Sandelman made one of the most incredible statements in the Q1 earnings release that just isn't seen in many other markets:
The results of our successful execution thus far can be seen in our April monthly revenues, which have nearly doubled since January. We expect step function growth across Q2, Q3 and especially Q4 2021, with further milestones reached when additional cultivation projects come on-line and we close our New Jersey acquisition later this summer.

At $30, the stock market continues to doubt the growth inherent in buying Liberty Health in Florida and acquiring assets in Arizona and New Jersey just as recreational cannabis is approved and sales ramp up. The company guided Q2 revenues to reach $90 million in a big 54% step-up in sequential revenues.
These quarterly numbers get Ayr Wellness much closer to reaching the goals of producing 2022 revenues of $725 million and adjusted EBITDA of $300 million based on U.S. GAAP. The company has substantial avenues for growth with cultivation capacity growing from 554K sq. ft. to nearly double to 1,033K sq. ft. by year-end 2022.

In addition, Ayr Wellness has the potential for substantial upside in Florida where sales from 32 retail locations were only generating a meager $11 million in quarterly revenue in November while reporting a 19% decline for the year. Ayr Wellness will end the year with at least 42 stores for 31% unit growth while greatly improving the productivity of each store with cultivation yields already up 60%.
Cheap Stock
The stock has rallied to nearly $30 in the last year, but the valuation multiple hasn't changed much. Ayr Wellness bought assets such as Liberty Health in Florida and the pending deal in New Jersey for less than 5x 2022 EBITDA targets.
The stock trades for less than 7x 2022 EV/EBITDA targets while the MSO sector trades at double this multiple. Ayr Wellness would trade at $60 based on a similar valuation by the market while 14x EV/EBITDA target is still very cheap for a company generating far in excess of a 14% growth rate.



Source: Ayr Wellness Q1'21 presentation
When the company reports Q2 revenues reaching $90 million with adjusted EBITDA approaching $30 million, the market might finally actually appreciate the valuation multiple here. Analysts now have quarterly revenues soaring from the $90 million forecast by the company this quarter to over $130 million for the December quarter.


Data by YCharts
A lot of the Q4 numbers will depend on when the Garden State Dispensary deal closes. The target company has one of the 12 vertical licenses in the garden state with three open dispensaries and a cultivation footprint going from 30K sq. ft. to 105K sq. ft. Based on a maximum earn-out consideration that would push the purchase price up to nearly $200 million, the deal multiple would suggest the GSD could generate up to $50 million in EBITDA alone next year.

The biggest risk to the story is integrating a wide range of acquisitions into the business. Ayr Wellness was relatively small just a year ago and such moves can stretch the managerial talent very thin.

The company has ~$200 million in cash on the balance sheet with an almost similar amount of debt. In addition, Ayr Wellness ended the March quarter with $141 million in contingent considerations.

The company will need to pay at least $41 million in cash to close the New Jersey deal. Typical of the cannabis sector, investors must be prepared for Ayr Wellness to raise additional funds to close deals and continue to grow in areas like Florida and New Jersey that need more investment.
Takeaway
The key investor takeaway is that Ayr Wellness remains an extremely cheap MSO. The market hasn't accurately factored in the substantial growth inherent in the cheap deals recently closed by the company. Investors should use any weakness in the cannabis space to load up on Ayr Wellness while knowing a growth sector such as cannabis as an inherent risk.

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.


Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.