Ayr Wellness Inc. (AYR.A:CSE; AYRWF:OTCQX) recently reported solid results for the first quarter of this year (Q123), noted Andrew Semple in a May 17 Echelon Capital Markets research note.
Results were better than expected, according to Semple, after adjusting for "the accounting of Arizona as discontinued operations." The company's organic sales growth and adj represented strong progress, as well as the reduction of its expenses. This expense reduction is of premier importance to Ayr's management team, and the company projects to reach a 30% adj.
Semple stated he saw promise in the company's outlook through the guidance management demonstrated during the second quarter of 2023. He noted, "Management guided to Q223 demonstrating the same pace of sequential sales and EBITDA growth, which we believe implies Q223 sales of roughly US$121 million and adj. EBITDA of approximately US$28.7 million."
Ayr expects growth to ramp up in H223 due to new stores being opened. There will be 17 new locations in Florida and two in Ohio.
"With ~18 months until maturity, we believe Ayr has a sufficient window to demonstrate improved financial performance, supporting our ongoing bullish view, but we acknowledge that macro conditions outside of the Company’s control have increased the risk profile of the business and narrowed its margin of safety," Semple stated.
Semple also reiterated that the new management team has already begun to take on previous concerns. This included a restructuring of a few contingent consideration payments and seller notes, leading to a large reduction in potential shareholder dilution.
Key Highlights
Semple thought it pertinent to point out some key reasons for his evaluation of the company.
- Results for Q123 were better than expected after adjusting for the divestiture of Arizona.
- Forward profitability estimates were upheld by guidance from management.
- Two new medical dispensaries were reopened in Flordia, leading to a current total of 59 in the U.S.
- The formal closure of its portion of the Tahoe Hydro acquisition, previously pending regulatory approval.
- The formidable restructuring of contingent consideration, increasing cash consideration, and materially reducing dilution.
- The prior COO, Jen Dranke, agreed to step down in April.
- With EBITDA estimates being held solid, Q123 print and management's outlook gave Semple confidence in the company's ability to reach forecasts for the rest of 2023.
2024 Estimates
With all of the above, Semple also introduced estimates for 2024. These are listed as follows.
- Revenue: US$568 million
- Adjusted Gross Margin: 51.9%
- Adjusted EBITDA: US$149.7 million
With these, Semple commented, "We note that our 2024 estimates show a solid double-digit pace of growth expected in 2024, though not as steep as the nearly 30% y/y increase expected by the consensus estimate, which we view as too aggressive . . . We believe Ayr sustainably hits breakeven levered FCF by 2024 (prev. Q423)."
Structure and Predictions
In his report, Andrew Semple raised his target price from CA$5.50 to CA$6.00.
Semple's research also shared current market data on the company.
- Price: CA$1.34, with a 52-week range between CA$0.78 and CA$8.63.
- Price Target: CA$6.00
- Market Cap: CA$76.3 million
Semple noted a projected return of 348% and gave Ayr Wellness a speculative Buy rating.
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Disclosures for Echelon Capital Markets, Ayr Wellness Inc., May 17, 2023
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ANALYST CERTIFICATION
Company: Ayr WellnessInc. | CNSX:AYR.A
I, Andrew Semple, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
