Liberty Health Sciences Inc.

Cannabis | Estimates Revised

FQ3/19 update

LHS-CSE | Price C$0.95 | Market Cap C$331M

SPECULATIVE BUY Unchanged

PRICE TARGET C$2.00 Unchanged

Click here to read the full note

After previously providing a FQ3 pre-release and operational update in December, Liberty Health Sciences, Inc. filed its FQ3 statements yesterday (for the quarter ended Nov 30) with revenues coming in as expected at C$3.2M (up 45% QoQ). With ~184 kg of product sold during the quarter, Liberty was able to achieve a premium price of ~C$17.25 per equivalent gram of cannabis sold spanning its ~70 SKUs. During the quarter, the company also saw a healthy increase in its registered patient base, which as of the end of FQ3, sat at 14,500 patients. This represents ~9.3% of all active patients in a state that we believe will eventually grow to a revenue opportunity of >US$1.5B (excluding recreational upside). Although Liberty’s top line is still sitting at a relatively modest base, we note that the company continues to make substantial operational progress with an additional three dispensaries opened during the quarter and one subsequent to period end. Management plans to end FY2019 (Feb/19) with a total of 14 retail locations (a >3x increase from its dispensary profile just one quarter ago).

During the quarter, Liberty reported measured cash operating expenses of ~C$4.1M, up from C$3.5M in FQ2 and in line with our forecast of C$4.3M. As a result, the company reported an Adj. EBITDA loss of (C$2.8M); however, with eight dispensaries currently open throughout the state (up from four at the end of FQ2) and a Florida market that continues to experience rapid growth, we believe Liberty is close to inflecting to EBITDA positive, potentially as early as next quarter.

Investment Highlights

Establishing strong infrastructure. Liberty is currently building out a customized 225,000 sq. ft. greenhouse in Gainesville, Florida that is expected to be complete by Spring/19 and yield 14,600 kg of annual output (or >C$250M of potential revenue at Liberty’s current pricing). With eight dispensaries up and running, we believe the company is already positioned as one of the top players in the state.

Lining up assets for multi-state expansion. In addition to its current penetration into the Florida medical market, Liberty also owns a 50.1% interest in a JV with the Schottenstein Group for a processing and dispensary license in Ohio, with its first retail location expected to open in March under the moniker “Mad River Dispensaries” in addition to an agreement to potentially acquire a license in Massachusetts.

Valuation: We value Liberty Health using a sum-of-the-parts analysis for each market where it has exposure. We utilize a DCF methodology, with discount rates ranging from 10% to 13% and a terminal growth rate of 2%. After updating our model for the quarter, our SOTP valuation continues to yield a target price of C$2.00. This represents a forecast return of 111% and supports our SPECULATIVE BUY rating.

After seeing its share price decline >30% after the publication of a short seller report (predominantly related to its previous strategic partner Aphria), Vic Neufeld (Aphria’s CEO) has stepped down as Chair of the company and Liberty has since elected two new independent directors. LHS currently trades at 7.0x our CY2020 EV/EBITDA, a discount to its US peer group average of 9.6x (and larger MSOs at 11.2x). As we believe the recent share price decline is not rooted in fundamentals and Florida represents one of the healthiest medical cannabis markets in the US today, given Liberty’s strong position in the state (with further optionality in MA and OH), we believe a higher multiple for LHS is warranted at this time and would be buyers on this recent pullback.