CA - Curaleaf: TSX Uplisting Isn't Likely To Help

2023-12-14 16:51:46 ET

Summary

• Curaleaf Holdings, Inc. uplisted to the Toronto Stock Exchange starting December 14, but the stock likely will see limited benefits.
• The cannabis MSO has better growth opportunities with recreational cannabis opportunities in New York, Ohio, and Germany.
• Curaleaf Holdings stock isn't the cheapest in the cannabis space, but Curaleaf is a market leader and offers good value.

Curaleaf Holdings, Inc. ( CURLF ) uplisted to the Toronto Stock Exchange on December 14. The share structure to achieve this goal isn't likely to attract major institutional investors, leaving the multi-state operator ("MSO") trading at a ridiculously low valuation. My investment thesis remains Bullish on the cannabis stock, but Curaleaf needs regulatory action and positive cash flows, not stock exchange tricks.

TSX Uplisting

At the opening bell on December 14, Curaleaf officially uplisted to the TSX under the ticker symbol "CURA" from the Canadian Securities Exchange, or CSE. Most importantly, the stock won't be uplisting to the major U.S. exchanges of the NYSE and Nasdaq.

Executive Chairman Boris Jordan made the following statement in connection with announcing the official uplisting:

As Curaleaf is now eligible for inclusion into indexes such as TSX and MSCI, this uplisting will ultimately provide significantly higher access to an even broader set of institutional investors from around the world and increase our stock's liquidity long term.

In theory, institutional investors will have fewer restrictions to investing in a stock on the TSX, but the exchange clearly isn't the ideal location for big investors to purchase stock. Another issue is that Curaleaf had to issue subordinate voting shares in order to get approval for illegal operations.

As well, Canopy Growth ( CGC ) and other Canadian cannabis stocks have long listed on the major stock exchanges due to not having illegal operations in the U.S. These cannabis LPs mostly operate in the legal markets in Canada, and being listed on the major stock exchanges originally provided excessive stock valuations, but now Canopy Growth just announced a 1-for-10 reverse stock split due to weak results and corresponding stock prices.

Curaleaf just needs to continue focusing on delivering positive cash flows in order to reward shareholders. The potential growth opportunities in Germany, New York, and Ohio will drive the stock more than an uplisting to the TSX.

TerrAscend ( TSNDF ) initially traded higher in early 2023 on the promises of uplisting to the TSX last July, but the stock has now underperformed Curaleaf over the last year. The small MSO being on the TSX hasn't driven any sustainable increase in the stock.

Regulatory Hiccups

The bigger problem for the cannabis sector is on the ongoing regulatory hiccups. The sector expected the U.S. DEA to reschedule cannabis to Schedule 3 of the Controlled Substance Act by year-end, and this doesn't appear the case now. Also, Curaleaf specifically thought the Germany market would move forward more aggressively with recreational cannabis.

Germany delayed the vote to approve recreational cannabis due to concerns from the Social Democratic Party. The bill had already been scaled down and now won't be voted on until 2024, with the following general provisions:

• Decriminalization of cannabis.
• Home cultivation and possession starting April 1, 2024.
• “Cultivation clubs” that would launch sometime next summer.

As par for the course, cannabis continues making progress towards more and more access, as seen via the move into wholesale adult-use cannabis in New York. Curaleaf announce the first wholesale adult use cannabis sales in New York on December 12 after receiving approval from the New York State Office of Cannabis Management ("OCM") on Friday, December 8.

Along with 5 other MSOs, Curaleaf is approved to enter the New York retail market on December 29. The New York cannabis market has long been promoted as a $5+ billion market opportunity once fully unlocked, but regulations have limited sales to an estimate of only $110 million, so far in 2023.

Ohio is another promising adult-use cannabis state, with voters passing legalization in November. Unfortunately, the Ohio politicians are looking to rewrite what voters approved , delaying the implementation of adult-use cannabis in a state set to reach $4 billion in sales.

Curaleaf has 2 stores in Ohio, with plans for 4 more stores. The MSO has a lot of potential sales growth ahead in both New York and Ohio, but investors are very cautious on the upside potential here.

Takeaway

The key investor takeaway is that the stock isn't the cheapest in the cannabis sector, but Curaleaf is still a good buy trading at about 10x EV/EBITDA targets for 2023 in the $300 million range. The stock has plenty of upsides with adjusted EBITDA growth in the years ahead from the catalysts expanding recreational cannabis sales in New York, Ohio and even Internationally.

Investors should use weakness in Curaleaf to load up on a leading cannabis player due to the cheap valuation and growth opportunities, not due to any immediate rally from the uplisting to the TSX.

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