Cansortium: Investor Meetings Highlight Favorable Turnaround (OTCMKTS:CNTMF)

Cansortium (OTCQX:CNTMF) reported Q1/22 un-audited results of $19.7M in revenues and $6.2M adjusted EBITDA. Revenues were in line with expectations while adjusted EBITDA exceeded our estimate of $4.9M. Management also reiterated full-year 2022 guidance of between $90M and $95M in revenues and adjusted EBITDA in the range of $25M to $28M. We continue to believe guidance reflects extreme conservatism as it does not include any contributions from new dispensaries (management expects to open between four and six new Florida stores before yearend) and we are confident that over the past three months Cansortium has at times generated revenues at closer to a $120M annualized run rate in Florida. We believe the run rate will increase further in the coming months particularly as enhanced production capabilities come online. Official results remain delayed by auditors however we believe any further issue with actual reports is unlikely and anticipate a resolution on the audit delay will come in the coming weeks.

In addition to earnings, we hosted Cansortium’s CEO Robert Beasley and CFO Patricia Fonseca for a series of investor meetings this week. Meetings furthered our view of Cansortium as an underappreciated growth story in the space and specifically highlighted the successful turnaround for Cansortium and the company’s favorable position in Florida. According to OMMU data, Cansortium’s flower sales are up more than 100% since enhanced cultivation capacity came online this winter and the company is gaining meaningful share in the state. The latest weekly sales data reflects a roughly 4% share in Florida which positions Cansortium as the sixth biggest operator in the state. We expect further growth and share gains will come in the coming weeks and months on further production enhancements, repeat customer interest now that the company can offer a greater and more consistent breadth of inventory and the opening of additional retail stores. At the investor meetings, Mr. Beasley highlighted a long-term target of roughly 45 dispensaries in Florida (vs. 27 today) which would put the company roughly in line with other top operators in the state (aside from Trulieve). We believe this store opening goal and the requisite cultivation expansion is fully feasible particularly if the company sells its Texas license in the near term with proceeds being used to pay off what has to-date been restrictive debt.

Meanwhile, the story looks attractive even without further expansion. Cansortium is growing in Pennsylvania, having recently opened its third dispensary, generated initial cash during Q1/22, and was one of the most profitable companies within our coverage during the quarter. Despite positive momentum, Cansortium’s stock continues to underperform making the company one of the cheapest plays in US cannabis. Cansortium now trades at an EV/EBITDA multiple of just 4.1x our 2022 estimates and 2.6x 2023. Valuing Cansortium’s market cap based on licenses alone in either Florida or Texas (estimated at roughly $50M and $70M respectively) puts the price well above current levels before even considering operations. We are confident that further execution will bring enhanced awareness and greater interest while the resolution of the audit issue or any M&A activity in the near term can provide a more immediate catalyst. We adjust our model to reflect the preliminary results while our rating and price target Buy and $1.50 respectively.

Takeout or Partnership in Play

We continue to view Cansortium as an attractive takeout partner for any MSO that is either looking for an entry into Florida at an immediate scale or for an existing operator in the state to quickly expand and make a viable challenge at Trulieve’s position in the state. This is true particularly if Cansortium’s valuation remains depressed.

Cansortium is currently trading on a market cap basis of less than the $55M cash paid by Planet 13 to acquire Harvest’s Florida. Meanwhile, while Cansortium’s $67M debt position is not insignificant, the terms are not particularly onerous for any operator aside from Cansortium (it limits the company’s additional financing capabilities in the near term), as the 13% rate could soon be attractive and the 2025 maturity is likely to be funded by Florida operation cash flows at that time. As previously stated, we believe a likely resolution for Cansortium in the near term is to sell its Texas license to pay off debt and then turn around and take on less onerous debt to fund expansion initiatives.

Along with a traditional exit via acquisition, a new takeaway from investor meetings was that, given improved fundamentals and operations, Cansortium could be in play for a merger of equals inclusive of other limited state operators that would benefit from enhanced consolidated scale in the form of capital and investor access. We have highlighted a likely increase in these types of transactions in US cannabis particularly if/when SAFE does not pass this year and if interest rates again become prohibitive for smaller operators as rates across the economy increase. For Cansortium, a merger of this form could help with funding growth initiatives and position the company for greater investor interest when greater institutional investment does enter the market.

Required Research Disclosures

	Distribution of Ratings/IB Services
			IB Services in Past 12 months
Rating	Count	Percent	Count	Percent
Buy (Buy)	15	100%	0	0%
Hold (Hold)	0	0%	0	0%
Sell (Sell)	0	0%	0	0%
Not Rated (NR)	0	0%	0	0%

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