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On Thursday, Ayr Wellness Inc. AYR AYRWF reported its financial results for the third quarter that ended September 30, 2022, with revenue of $119.6 million, up by 24.4% from $96.2 million in the same period of 2021.

Jonathan Sandelman, founder and CEO of Ayr, said the company “executed on its growth and profitability objectives during the third quarter, with our financial results largely in line with expectations.”

The Analyst

However, due to reduced estimates, Cantor Fitzgerald’s Pablo Zuanic affirmed they stay Neutral, although reducing their 12-month price target to $4.25 from $4.65.

The Thesis

AYR reported sales of $119.5mn showing a 9% seq growth, and adj EBITDA margin improvement of 30bps to 18.1%. Moreover, for 4Q22, AYR “expects a sales and margin ramp and is guiding for +10% seq growth in revenue and EBITDA for 4Q22 and a further ramp starting in 1Q23,” Zuanic said.

“Yes, the stock trades at a peer discount,” the analyst added, who thinks this is justified on above-average debt leverage, stock-based compensation, and execution risk.

Additionally, given sector volatility and depressed sectoral valuations, in stock picking within the MSO group, “we take a cautious approach and prefer companies with above-average strong balance sheets, good EBITDA to operating cash flow conversion, attractive footprints combined with relevant depth, and more established operations,” he continued.

In that context, the analyst gave AYR a Neutral rating.

In his view, the notion that some companies could be “consolidated” should be part of the investment analysis for mid-size MSOs. However, the company’s footprint “does not stand out vs. other potential targets.”

About Q322: “Results mostly came in line with management’s expectations,” reads the report.

  • Sales of $119.6mn “were up 9% seq, +24% YoY, slightly below FactSet consensus estimate of $121.4mn.”
  • AYR increased retail sales by 11% seq, partially offset by a 4% seq decrease in wholesale revenue driven by pricing compression and a drop in wholesale unit volumes as the company shifted more of its own products into its own retail channel.
  • During the quarter four large-scale cultivation facilities in Arizona, Massachusetts, Ohio, and New Jersey came online, although only the AZ facility contributed fully to the 3Q22 results.
  • Financial net debt was $369Mn, or 0.8x the current annualized sales run rate; but if we include income tax payables, deferred income taxes, earnouts, and leases, broadly defined net debt adds up to $769Mn or 1.6x sales, according to the financial analysis.

Outlook: According to the analyst’s view, the main risk is debt leverage and cash flow.

“FCF for the first three quarters was -$94mn and financial net debt increased from $225Mn at YE21 to $369mn by the end of September, said Zuanic. If “we include leases, tax liabilities, and contingencies, the full net debt load is a sector high of 1.6x sales. FCF for 3Q22 alone was -$7.7mn, although still negative it was much improved compared to -$31mn in 2Q22, and -$54mn in 1Q22.”

Valuation and price target

For 12-month price target (November 2023) purposes, the analyst takes a 20% sector discount on his forward estimates, which yields a price target of US$4.25.

“Given the stretched balance sheet, above-average execution risk, and also above-average stock-based compensation, we think the stock discount is warranted,” Zuanic concluded.

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Photo: Courtesy Of 2H Media On Unsplash


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