MRMD - MariMed: Still Overlooked

Summary

• MariMed agree to acquire a small cannabis business out of receivership adding one dispensary in Massachusetts.
• The company only has 8 open dispensaries and 2 additional stores in Massachusetts will boost open cannabis stores by 25%.
• The stock remains cheap at just 1x sales and 5x adjusted EBITDA with plenty of catalysts for growth.

At the end of 2022, U.S. politicians failed to approve new cannabis regulations sending the multi-state operators (MSOs) back to trading at the lows. MariMed ( MRMD ) is one of the small MSOs benefitting from the current environment where assets are cheap to acquire while the stock would surge on any positive change in federal regulations. My investment thesis remains Bullish on the stock at the lows.

Cheap Deal

As cannabis assets have plunged and a lot of industry players lack access to capital to expand anymore, the public traded MSOs have the best assets to offer business owners in the space. For this reason, MariMed was able to acquire the assets of Ermont out of receivership.

The small MSO will acquire a medical licensed vertical cannabis operator with a dispensary in Quincy, Massachusetts. Assuming the deal closes, MariMed will have a third dispensary in the state hitting the maximum allowable by state regulators. The company expects to turn the dispensary into an adult-use cannabis store with expanded capacity.

MariMed is still waiting on approval of their 2nd store in Massachusetts. The acquisition of the Quincy store will expand operations in the state from one dispensary to three almost overnight providing leverage and higher profits in Massachusetts.

MariMed remains a relatively small MSO, so any additional stores is meaningful to growing their business. The company only has 8 open dispensary after opening the store in Maryland back in October.

Just adding the 2 stores in Massachusetts will grow the open store count by 25% in short order to start 2023. MariMed is additionally working on opening stores under development in Illinois and Ohio to bring the store count to 12 for 50% growth from the end of 2022 level.

The weak market for cannabis assets should provide MariMed the opportunity to acquire additional asset in states where the company is far below regulatory dispensary limits. The MSO is not anywhere close to regulatory limits in key states like Illinois, Maryland and Ohio providing the upside potential of the company.

Valuations Don't Matter Now

The market just doesn't care how low the MSO valuations fall. MariMed has a fully diluted market cap of only $200 million, assuming nearly 65 million options and warrants are eventually exercised.

The MSO guided to 2022 revenues of ~$134 million and analysts forecast a 2023 target of nearly $153 million. Of course, the revenue target for the year doesn't factor in the recently acquired Massachusetts store and doesn't appear to assume any growth from additional stores for the year.

MariMed is already adjusted EBITDA profitable and additional stores in Illinois and Massachusetts should only help make the company more profitable. EBITDA margins were a solid 25% in the last quarter, but the numbers can definitely improve during 2023 after falling from 38% back in Q3'21.

Before the difficult macro conditions hit the spending in the cannabis space, MariMed had originally forecast 2022 revenues reaching $200 million. In addition, the small MSO has a business built for a revenue base of up to $500 million now when the company fully builds out the store limits in key states.

MariMed ended the quarter with a cash balance of only $11 million with minimal debt levels. The company was able to produce positive cash flows in the last quarter reducing the need to raise additional cash to fund operations unless the MSO has a good investment case.

Takeaway

The key investor takeaway is that MariMed is a cheap stock trading at just over 1x sales targets and close to 5x adjusted EBITDA targets for just last year. At some point, the U.S. federal government will likely finally approve cannabis or reschedule the drug allowing these MSOs to obtain easier access to capital and list on major stock exchanges.

Small MSO like MariMed provide substantial upside potential when the regulatory environment changes for the good. Not to mention, the company can use the current weak environment to buy small cannabis assets at depressed values to the benefit of shareholders.

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