AYRWF is a LONG
BIG PICTURE
Ayr reported strong 1Q21 results and put forth a path to an even better 2H21 and 2022. The company reported revenue growth of 74% YoY and adjusted EBITDA more than doubled. Growth in 2Q21 was primarily organic as the acquisitions closed too late in 1Q21 to contribute any meaningful revenues.
The company had a busy quarter, closing three acquisitions in 1Q21, beginning in February with Liberty Health Science (the fourth most significant retail footprint in Florida.) The company also closed the Arizona acquisition at the end of March, adding three new dispensaries and a significant cultivation expansion in one of the latest adult-use markets. In March, they also closed the acquisition in Ohio. Ayr harvested flower in Pennsylvania called Revel, which hit the shelves in early May and opened its sixth store in Nevada. Looking to 2Q21, the company said April monthly revenues have nearly doubled since January. Ayr has built a solid foundation for the future, with the N.J. acquisition closing soon. In 2021, the company will focus on building brands in the seven states that it operates and putting significant resources into elevating and evolving the Ayr Wellness brand.
The company said they have partnered "with a premier branding company to build the foundation for our national branding strategy to be cultivators of wellness and creators of wonder. We are developing iconic branding to bring this to light, including reimagining the dispensary design and consumer experience. This retail concept will be introduced first in our Ayr Wellness Pennsylvania stores and showcased in the new Greater Boston adult-use stores and then rolled out across Florida and the rest of our footprint when the time is right.”
On June 1st, they will introduce Origyn Extracts to the Florida market driving further growth. According to BDS, the company reported that in MA, Origyn since its debut late last year, sold over $2.2 million in retail in March, more than doubling its fourth-quarter revenue and has over 20% of the concentrate markets. Also, Wicked Sour Gummies, which have done well in M.A. and N.V., and will be launched in Florida and Arizona.
THE NUMBERS
1Q21 was the first quarter Ayr reported under U.S. GAAP. We are happy to have Ayr reporting under US GAAP, and notably, the change in classification doesn't impact cash flow. However, it does have an impact on reported (A)EBITDA, with $1.6 million of lease expense in 1Q21, which will continue to grow as the company builds out F.L. Based on company guidance and current expectations of the annual impact of this GAAP-related lease expense reclassification on (A)EBITDA, the 2022 adjusted (A)EBITDA target is $300 million from $325 million under IFRS.
In Q1, sales increased to $58.4 million, representing 22% QoQ. As mentioned above, exiting the quarter, there was an exponential jump of 72% in monthly sales relative to January sales, driven by an entire month of sales from Liberty Health and eight days of sales from the Arizona acquisition. (A)EBITDA in 1Q21 was $18.4 million, up 136% YoY and flat QoQ. Adjusted gross margins of 54% represent an 8% increase YoY and a 6% decrease in QoQ. The sequential decline was anticipated as they ramp retail operations in new supply-constrained markets, ahead of new cultivation facilities coming online that will ultimately drive margins higher. SG&A expense of $16.6 million represents 28% of sales, which was flat YoY. This company continues to build/invest in branding, talent, and infrastructure. In total, 1Q21 (A)EBITDA included only $1.6 million of start-up costs as they are one-time in nature. Ayr ended the quarter with $195.7 million of cash compared to $127.2 million to end the year. The increase in cash from year-end was primarily driven by an equity raise in January, with total gross proceeds of $118 million. The company spent $31 million in a combination of CapEx and acquisitions and $21.9 million paid in federal taxes after year-end.
OPERATIONS
For this stock to reach $100, efficient operations that drive profitable revenues and EBITDA are critical. To that end, COO, Jen Drake, make a compelling case for Ayr to be a top-tier U.S. Cannabis company. The opportunity that presents itself in Ayr today is the uncertainty of its ability to hit its 2022 target of $725 million in revenue and $300 million GAAP (A)EBITDA target. Thus the company trading at a discount valuation.
The first significant hurdle hitting those targets has been completed, as they have closed the acquisitions in Florida and Arizona. Also, they are ramping up in Pennsylvania with two new Ayr Wellness stores and cultivation. Those three states (including the sixth dispensary in Nevada) have doubled run-rate revenue in April versus January. In May, Ayr began selling its Ayr flower in Pennsylvania, which should drive incremental store and wholesales revenues while at the same time improving margins.
Adding to the revenue run rate will be closing the New Jersey acquisition in July; four additional dispensaries in Pennsylvania, seven more dispensaries in Florida, and additional manufacturing in Nevada coming online in June to drive wholesale revenue and margin at retail. Additionally, flower from the second phase of cultivation expansion in Pennsylvania in July will add significant capacity for revenue growth in a supply-constrained market.
Further incremental drivers of growth in 2022 will be: adult-use retail and wholesale sales in New Jersey as the new cultivation facility comes online; significant incremental growth in MA with the opening and ramp-up of three adult-use dispensaries in Greater Boston and opening the 75,000 square feet of new canopy for cultivation; launching our cultivation/product manufacturing in Ohio driving wholesale business. Also, Ayr will see retail gross margin expansion in Arizona as the new 80,000 square foot cultivation facility ramps up production.
The biggest driver of positive sentiment (improved multiple) will be the continued improvement in Florida, driving further revenue and EBITDA growth in 2022. A critical driver of that will be continued improvements in FL cultivation/production, driving a much better experience at retail. Official company guidance only assumes the Florida average revenue run rate of $4 million per year per store. Florida is such a vital state they are moving the corporate headquarters to Florida later in 2021. The CEO went on to say that "In the future, the Liberty Florida assets will be worth more than our entire market value today."
Notably, the company has a strong balance sheet with $200 million on the balance sheet. Jen went on to say, "We also have the expertise needed to make these milestones happen, with solid business foundations, scalable systems, operational controls in place and senior leadership and human capital over 1,500 people, 10 of whom are specifically dedicated SWAT team focused on the integration, project management and best practices and execution of the milestones that drive our 2022 projections. As we continue to scale operations in our 7 states, you will see a significant presence in states that matter. In 2022, 6 of our 7 states will contribute over $100 million of revenue to our $725 million revenue target." Lastly, completing the transition to reporting in U.S. GAAP and becoming a US filer means no additional regulatory reporting or audit hurdles to list on a US exchange.
THE PATH TO $100
Two issues will likely be resolved by the time we reach 2022; the company's ability to deliver on its operational execution and some form of legalization and potential uplisting. Both of these issues will contribute to better profitability and improved multiple.
The company's current target for 2022 EBITDA of $300 million does not include eliminating 280E or other potential acquisitions between now and the end of 2022. So a better target for EBITDA would be $330-$375 in 2022 EBITDA. Also, what guidance does not contemplate is FL going recreational in 2022, which would make $300 look easy. If the company trades at its current NTM multiple, the first stop is $65. If we model $350 in 2022 EBITDA and put a 20x multiple, we can see $100 in the next 12-18 months!
