kmatija/E+ via Getty Images
While the cannabis space has been weak, a few companies such as Ayr Wellness (OTCQX:AYRWF) had taken the cake on disappointments. A lot of the problems for this cannabis multi-state operator (MSO) stems around cultivation capacity expansion regulatory approvals, but the company hasn’t done a great job informing shareholders of the impacts. My investment thesis remains Bullish on the valuation of this MSO, but the company needs to finally deliver on growth initiatives.
Confusing Guide Down
Ayr Wellness reported Q1’22 results on May 26 and management kept the following guidance for the annualized run rates for Q4:
- Adjusted EBITDA – $250 million
- Operating income – $100 million
- Revenue – $800 million
The MSO reported Q2’22 revenues were down slightly at $110 million. The company suggested results were in line with expectations, but analysts expected revenues for the quarter up at $115 million.
The unclear point was the path of getting from the $110 to $115 million level in Q2 to the $200 million level by Q4. The path definitely comes from opening the New Jersey and Boston area stores, but not much changed from the report on May 26 to August 17 when Ayr reported the Q2 earnings.
The macro economy definitely hit a weak spell, especially in consumer products due to high inflation led by soaring gas prices through July. Ayr knew that the three New Jersey stores weren’t open at the time of providing guidance and the stores ultimately opened on June 15.
The company finished the expansion of the second New Jersey cultivation facility in May and just announced the first harvest in August. Ayr Wellness expects the first flower from this facility to hit stores in September with edibles requiring additional processing time to follow.
Neither of these timelines appear off the known schedule back at the end of May. The company opened two Boston stores during July and expects to convert the Somerville store to adult-use later this year once obtaining local regulatory approval. The new cultivation expansion in Massachusetts just received state approval to begin production with initial product hitting stores at the start of 2023.
The market has definitely seen a shift to branded product being sold at company owned stores limiting the available third-party inventory. Such a lack of supply could be constraining store inventory with new product from cultivation expansion delayed too much into Q4 or early 2023 to help Ayr hit initial targets.
The MSO guided to 10% sequential growth in all above metrics for Q3’22 with acceleration in the pace of sequential growth in Q4’22. The guidance would suggest revenues hit $121 million in Q3 with 20% sequential growth in Q4 leading to revenues of $145 million.
The big question is whether Ayr is forecasting far faster growth in Q4 and into Q1 due to the capacity expansions. The few analysts covering the MSO now have revenues reaching $182 million in Q1’23, but the guidance was very unclear and the gap between these numbers and original expectations is massive.
On the Q2’22 earnings call, co-COO Jennifer Drake provided these nuggets on guidance providing some additional clarity on expectations for reaching $800 million in annual revenues being delayed, not altered:
…the macro environment is expected to impact our second half 2022 ramp in revenue and adjusted EBITDA. The growth profile and earnings potential of our new revenue generating assets remains strong, but the ramp time to reach their full potential is longer.
For Q3, we expect sequential revenue and adjusted EBITDA growth of 10% over Q2. In Q4, we anticipate sequential revenue and adjusted EBITDA growth to accelerate significantly relative to Q3. And we expect to deliver further growth in 2023 as our asset ramps and the improvements Jon discussed take hold.
Regardless, Ayr appears to have some issues with their dispensaries in the new locations and other states struggling to ramp due to company specific issues. CEO Sandelman spent a large portion of the time on the earnings call discussing updating menus, expanding POS stations and new management to improve the marketing and optimizing the retail locations.
Bargain Basement
The company has a cash balance of $117 million and has wrapped up most of their extension capex projects. The plan is to only spend $25 million during the 2H of the year with a similar amount in all of 2023 to mostly wrap up building the Massachusetts and Ohio cultivation expansions. Ayr Wellness has net debt in the $350 million in range in one major negative for the business.
A lot of the investment story is derisked with all but one of the crucial stores in New Jersey and Massachusetts opened for recreational cannabis sales. The stock only has a market cap of $300 million trading down towards $4 with a simple path towards $600+ million in annualized revenues and $150 million in EBITDA based on 25% margins. The company had adjusted EBITDA margins of 18% in Q2’22 and the new stores and cultivation expansions will clearly lead to expanded margins.
The base case for Ayr is a bargain basement price. If the small MSO can actually approach the original financial targets of $250 million in annual EBITDA, the stock is beyond a bargain basement level.
Takeaway
The key investor takeaway is that Ayr Wellness continues to disappoint the market with constantly pushing out big financial targets. If the company finally returns to growth mode as logic would suggest, the stock trades at a bargain basement level. The MSO might even approach previous strong targets with an improved macro picture. The major question is whether management can actually deliver on these goals.
Investors should use this stock dip as another opportunity to load up on Ayr Wellness.
Be the first to comment