Harvest Health & Recreation Inc

Vertically Integrated USA Cannabis Producer

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Volume | Market Cap | Shares | PEG Ratio | EPS

Fundamentals.

Profile:
HQ: Tempe, AX, USA
Founded: 2011
Facilities: 140 licenses
Symbol: HARV (CNSX), HRVSF (OTC)

Focus: Strong
Harvest Health & Recreation Inc. is one of the larger US cannabis companies. It is listed in Canada but is based in, cultivates, processes, and retails in the United States. It has an aggressive growth strategy. It currently operates 13 stores in 5 states, most of them in their home state of AZ. It does not yet pursue global opportunities.

Once its purchase of Verano is approved, Harvest will be able to operate 30 dispensaries, eight cultivation facilities and seven manufacturing facilities, with further expansion expected. If all its recent four acquisitions are approved, by end of 2019 Harvest may have over 70 dispensaries, 13 cultivation facilities and 13 manufacturing facilities in operation.

Size: Strong
Market Cap: US $1.56 bil
Enterprise value: $1.4 bil
# of employees: 750

Markets: Strong
Primary:  USA (Arizona, California, Florida, Pennsylvania, Maryland)
Secondary:   Ohio, North Dakota, Michigan

Operations: Strong
Cultivation: Exact cultivation capacity is unknown.

Distribution:
Direct salesYes
Store networks: Yes
Supply Agreements: Yes

Integration/Diversification:
Vertically integrated: Yes
Horizontally diversified: No

Partners/Subsidiaries:
Verano: Harvest bought Verano in March 2019 in an all-stock deal worth $850 million. Verano was one of the largest privately-held, multi-state, vertically integrated cannabis companies. The deal makes Harvest one of the largest multi-state operators in the U.S. as measured by licenses held and facilities permitted. The deal gives Harvest licenses to operate up to 200 facilities in 16 states and territories, including 123 retail dispensaries. It also brings: ethanol extraction technology at pharmaceutical grade levels; proprietary brands and 150 + product SKUs sold in 150 + retail locations; cultivation capacity of 900,000 sf in Illinois, Nevada & Maryland; interest in nine Zen Leaf dispensaries with average annual revenues 2.5x higher than cannabis industry averages

Falcon: Harvest bought Falcon in February 2019. Falcon is a California cannabis company involved in cultivation, manufacturing, wholesale distribution and brand development. It has 16 licenses, sophisticated production facilities with capacity for over one million packaged units per month, and distribution into 80% of CA’s retail dispensaries. Falcon will increase Harvest’s all-around capabilities in California, add a suite of brands (Cru Cannabis, Littles, and High Garden), and augment Harvest’s management team.

CannaPharmacy: CannaPh is licensed to cultivate and process in Pennsylvania, an important market for Harvest. It also has a facility in New Jersey and an asset in Delaware.

Financials:  Neutral
Outstanding shares (diluted): 275 mil
Revenue last year: $57.7 mil
Revenue rank in cannabis industry: 13th
EPS: ($0.31)

Management: Strong
Founder/CEO: Steven White
CFO: Leo E. Jaschke
President: Steven D. Gutterman
COO: John Cochran
Chief Marketing Officer: Kevin George

Branding: Neutral
Harvest Health is a very focused on building strong brands.

Valuation: Strong
Current share price: US $5.48
Price to Sales: 20 (Tobacco industry Avg. = 5)
52 Week Low/High: $3.60 to $10.85
EV / Revenue: 19

Financings: Strong
In May 2019, Harvest closed the first tranche of its private placement of 7% unsecured convertible debentures, at a price of $1,000 per debenture, raising US$100 million in debt that can be converted to stock. Harvest will use the proceeds for general corporate purposes. The notes pay 7% and mature in 2022.

Its institutional investor has agreed to purchase (subject to approvals), up to 4 additional tranches of 100,000 convertible debentures at the issue price, for additional gross proceeds of up to US$400 million. This may or may not be exercised.

Risks: Neutral
The risks of investing in any cannabis company is currently high given the volatility of the market. The risks of investing in this company do not seem to have more risk than other cannabis companies.

Recommendation: Strong
Harvest Health is a company to watch. It has assembled a strong management team with experience in banking, major branding companies, and a lot more. It has shown ability to execute on its strategy. It began with success winning licenses, and after it became adept at raising money, it has launched an aggressive M&A campaign. It raised $300 million in its reverse takeover public offering, and recently raised $100 million of a projected $500 million private placement, fueling its war chest for future growth.

It has reached deals to buy 4 significant companies in the last year, including Falcon, CBx Enterprises, Verano, and CannaPharmacy. The deal to buy Verano has been called the biggest acquisition in US cannabis history. These deals are not yet fully approved by the regulatory authorities, but we suspect they will be in due time.

If all its recent four acquisitions are approved, by end of 2019 Harvest may have over 70 dispensaries, 13 cultivation facilities and 13 manufacturing facilities in operation, making it one of the biggest US players.

We love that Harvest has released revenue guidance for the coming two years. Harvest pro forma revenue guidance (counting acquisitions that are not yet approved) for 2019 is $350 to $400 million with 20% EBITDA margins. In 2020, it expects pro forma revenue of $900 million to $1 billion with EBITDA margins of 30 to 35%.

Harvest is currently generating revenue at a roughly $76 million per year pace. Based on its current share price and price to sales ratio, we think Harvest is currently priced for revenue of about $300 million.

Its revenue guidance exceeds this. This means that if its deals are approved, and it achieves the pro forma revenue it said it can achieve, it will exceed this revenue in the coming year or two. If it does this, it will certainly push its stock price higher than it is today.

The stock price has been pulled down in recent weeks due to a general downturn for the cannabis industry. We think we see a good opportunity to buy this stock now, which the price is low.

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