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We caught up with Schwazze (OTCQX:SHWZ) senior management last week to follow up on the recent Q4/21 earnings report and the company’s enviable position in the initial days of New Mexico rec sales.
Q4 results of $27M in revenues and $7.5M adjusted EBITDA came in largely as expected with revenues modestly below the low end of guidance but adjusted EBITDA in line with expectations. Growth for 2022 will be less than our prior expectations on integration timing and some delays with expansion projects. We reduce our estimates to reflect guidance (of an annualized run-rate of $220M to $260M in revenues and adjusted EBITDA of $70M to $82M by Q4/22) but never- the-less the company remains one of the top growth stories in the space without even factoring in additional state expansion or further M&A in Colorado and New Mexico. We note our belief that management is being conservative with guidance and believe there are meaningful sources of upside to our forecasts particularly in late Q2 and Q3 with existing operations. Additionally, we believe further expansion is forthcoming and that will be incremental to forecasts. Regardless, Schwazze remains one of our top picks in the space as a rare focused execution story in US cannabis.
Importantly, Schwazze’s anticipated growth should be considered a safer bet than that of many of the company’s high growth peers given the fact that execution is narrower in scope and not dependent on legislation or the integration of highly developed assets spread across the country. Furthermore, we believe management’s past proven track record in other traditionally competitive industries warrants credit. We are confident that continued execution and the reporting of future earnings results will highlight the scale of operations that have been developed at Schwazze and bring greater awareness for the company and further upside in the stock. Our rating remains Buy while we raise our price target to $3.20 from $2.75.
Safer High Growth Opportunity
We expect Schwazze to remain acquisitive in both Colorado and New Mexico in the near term. We also believe expansion into additional markets is possible with a likely focus being in nearby states such as Arizona, Nevada or eventually Texas.
Without additional deals, the company will be one of the fastest revenue growers in the space with a projected ’21-’23 revenue CAGR of >60% and projected annual adjusted EBITDA growth of nearly 80%. Anticipated revenue growth is one of the highest in US cannabis and of those with higher projected growth few also have existing scale ($108M in ’21 revenues) and are not reliant on legislation or transformative acquisition(s). While Schwazze is a consolidator that has grown through acquiring assets, the company is different in that it is not relying on any single transaction to fuel growth. Instead the company is executing on the integration of a series of smaller acquisitions which each offer similar characteristics to each other (primarily being smaller CO companies). This strategy should significantly reduce the risk of execution on integration and the achievement of broader goals. Furthermore, we are confident in management’s ability to execute with transactions and in integrating acquired assets and believe management’s capabilities in this area are a competitive advantage for Schwazze. Investor meetings highlighted this topic with much of the discussion focusing on the company’s pragmatic approach to expansion and the integration of assets. We note that Schwazze’s CEO & Chairman, Justin Dye, led Albertson’s through more than $40B in M&A and real estate transactions and oversaw rapid revenue growth for the company in his prior career.
Well Positioned in Newest Rec Market
Following last year’s acquisition of Green Leaf, Schwazze became one of the top operators in New Mexico. New Mexico opened for initial recreational sales on April 1st. While not the most populous state, we believe New Mexico presents a meaningful growth opportunity with the state expected to have ~$600M in annual sales within the next few years according to BDSA estimates while management is confident that it can be a $1B longer term. We believe early sales trends were strong in New Mexico and are confident that the established leadership position for Schwazze in the early days of New Mexico’s rec market will translate to significant and sustainable advantages including disproportionate retail demand, brand development opportunities and high margin wholesale sales.
For this year, we estimate New Mexico contributions to be $14M in revenues and $3M in adjusted EBITDA. Meaningful upside in price target
Following recent gains for the stock, Schwazze is valued at an EV/EBITDA multiple of 6.8x our 2022 forecast and 3.5x 2023. The 2022 multiple remains below that of the broader peer group (8.5x) and even similarly sized operators within our coverage. We believe execution will bring greater awareness amongst investors and translate to further outperforming stock returns.
Our $3.20 Price Target reflects an EV/EBITDA multiple of 10.3x our 2022 estimate and 5.2x 2023.
We revise our estimates
- Revenues: Q1/22 from $40M to $30M; 2022E from $238M to $184M; 2023E remains at $296M
- Adjusted EBITDA: Q1/22 from $10.6M to $6M; 2022E from $78.7M to $55.9M; 2023E remains $110M
|
2020 |
2021 |
2022 |
2023 |
|||||||||
|
2020 Dec-20 |
2021 Dec-21 |
Q1 ’22E Mar-22 |
Q2 ’22E Jun-22 |
Q3 ’22E Sep-22 |
Q4 ’22E Dec-22 |
2022 Dec-22 |
Q1 ’23E Mar-23 |
Q2 ’23E Jun-23 |
Q3 ’23E Sep-23 |
Q4 ’23E Dec-23 |
2023 Dec-23 |
|
|
Revenues |
24 .0 |
108 .4 |
30 .0 |
44 .0 |
50 .0 |
60 .0 |
184 .0 |
62 .0 |
78 .0 |
80 .0 |
76 .0 |
296 .0 |
|
COGS |
17.2 |
59.1 |
16.2 |
22.9 |
25.5 |
29.9 |
94.5 |
33.2 |
40.2 |
40.8 |
37.8 |
152.0 |
|
Gross Profit |
6.8 |
49.4 |
13.8 |
21.1 |
24.5 |
30.1 |
89.5 |
28.8 |
37.8 |
39.2 |
38.2 |
144.0 |
|
SG&A |
4.5 |
16.6 |
5.4 |
6.0 |
6.0 |
6.0 |
23.4 |
6.0 |
5.5 |
6.0 |
6.0 |
23.5 |
|
Professional |
8.5 |
5.3 |
0.9 |
1.0 |
1.0 |
1.0 |
3.9 |
0.9 |
1.0 |
1.0 |
1.0 |
3.9 |
|
Salaries |
8.4 |
11.9 |
3.5 |
3.6 |
3.6 |
3.6 |
14.3 |
3.5 |
3.6 |
3.6 |
3.6 |
14.3 |
|
Stock Based Comp |
8.2 |
5.0 |
1.0 |
1.0 |
1.0 |
1.0 |
4.0 |
1.0 |
1.0 |
1.0 |
1.0 |
4.0 |
|
Opex |
29.7 |
38.9 |
10.8 |
11.6 |
11.6 |
11.6 |
45.6 |
11.4 |
11.1 |
11.6 |
11.6 |
45.7 |
|
Income from operations |
(22.9) |
10.4 |
3.0 |
9.5 |
12.9 |
18.5 |
43.9 |
17.4 |
26.7 |
27.6 |
26.6 |
98.3 |
|
Interest Expense |
0.0 |
(7.0) |
(2.0) |
(2.0) |
(2.0) |
(2.0) |
(8.0) |
(2.0) |
(2.0) |
(2.0) |
(2.0) |
(8.0) |
|
Total Other Expense |
2.6 |
8.5 |
(2.0) |
(2.0) |
(2.0) |
(2.0) |
(8.0) |
(2.0) |
(2.0) |
(2.0) |
(2.0) |
(8.0) |
|
Pre-tax Income |
(20.3) |
18.9 |
5.0 |
11.5 |
14.9 |
20.5 |
51.9 |
19.4 |
28.7 |
29.6 |
28.6 |
106.3 |
|
Taxes |
(0.8) |
4.4 |
0.4 |
0.4 |
0.5 |
0.5 |
1.8 |
0.4 |
0.4 |
0.5 |
0.5 |
1.8 |
|
NCI |
||||||||||||
|
Net Income |
(19.6) |
14.5 |
4.6 |
11.1 |
14.4 |
20.0 |
50.1 |
19.0 |
28.3 |
29.1 |
28.1 |
104.5 |
|
EPS |
(0.5) |
0.3 |
0.1 |
0.3 |
0.3 |
0.5 |
1.1 |
0.4 |
0.6 |
0.6 |
0.6 |
2.3 |
|
Shares |
41.1 |
46.0 |
43.6 |
43.8 |
44.0 |
44.2 |
43.9 |
44.4 |
44.7 |
44.9 |
45.1 |
44.8 |
|
Adjusted EBITDA |
( 9 .9 ) |
32 .2 |
6 .0 |
12 .5 |
15 .9 |
21 .5 |
55 .9 |
20 .4 |
29 .7 |
30 .6 |
29 .6 |
110 .3 |
|
% Revenues |
||||||||||||
|
Gross Margin |
28% |
46% |
46% |
48% |
49% |
50% |
49% |
47% |
49% |
49% |
50% |
49% |
|
Opex |
124% |
36% |
36% |
26% |
23% |
19% |
25% |
18% |
14% |
15% |
15% |
15% |
|
Operating Income |
-95% |
10% |
10% |
22% |
26% |
31% |
24% |
28% |
34% |
35% |
35% |
33% |
|
Net Income |
-82% |
13% |
15% |
25% |
29% |
33% |
27% |
31% |
36% |
36% |
37% |
35% |
|
Adjusted EBITDA |
30% |
20% |
28% |
32% |
36% |
30% |
33% |
38% |
38% |
39% |
37% |
|
|
Growth Rates |
||||||||||||
|
Revenues |
||||||||||||
|
Y/Y |
352% |
55% |
43% |
57% |
126% |
70% |
107% |
77% |
60% |
27% |
61% |
|
|
Q/Q |
13% |
47% |
14% |
20% |
3% |
26% |
3% |
-5% |
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