2023-04-24 08:02:20 ET
Summary
- Ayr Wellness is down 92.6% over the last year even as cash burn in recent quarters moderates.
- The company's multiple to trailing 12-month sales at 0.097x have collapsed to unfathomable lows.
- With its liquidity position improving in recent quarters, the expansion of Ayr's current near-distressed multiple provides a dream for its bulls.
- However, its debt burden is simply too large and forms material headwinds to Ayr's future.
Ayr Wellness (AYRWF) is collapsing. The stock is down 48.8% year-to-date, a performance that worsens to 92.6% when you zoom out over the last 12 months. It would be an understatement to state that the valuation has fallen through the floor with Ayr now trading for 0.097x its trailing 12-month sales. To be clear, this is around 98% lower than its peer group median and a level that likely places the company at a rare abnormal discount that's hard to find in the stock market outside of highly distressed or near-bankrupt companies. What's happening?
The company has been sliding since the start of 2021 on the back of an inversion of previously euphoric cannabis sentiment that drove the sector to new highs during the pandemic. Critically, the risk-off sentiment and rapid retail-led trading mania that defined much of the early months of the pandemic gave way to a nuanced pragmaticism around profitability, cash burn and a still-rising Fed funds rate.
Ayr has been forced to depend on dilution to close on acquisitions that have recently been written down. This has set the backdrop for cash burn from operations for its fiscal 2022 of $34.2 million , up from $27.8 million in 2021. The company has overseen a dramatic expansion in the number of its common shares outstanding, up 133% over the last 2 years. Cash burn on the back of cannabis headwinds, shareholder dilution, and a collapse of broader cannabis investor sentiment will continue to drive underperformance in the near term with bulls now looking towards a normalization of the price-to-sales multiple as an avenue for positive returns.
Cash Burn Green Shoots And The Debt Burden
The New York-based company cultivates and retails cannabis. It's a multi-state operator operating a number of retail brands from Liberty Health Sciences in Florida, MYNT in Nevada, and Ayr in Pennsylvania and Massachusetts. The MSO reported fiscal 2022 fourth-quarter revenue of $124.6 million , up 11.4% over the year-ago comp but a miss by $4.13 million on consensus estimates. Revenue for the full year came in at $465.6 million, up 30.2% from 2021. This is set against Ayr's current market cap of $43 million.
Ayr trades on the lowest sales multiple amongst its MSO peers with Cresco Labs (CRLBF), the second lowest, trading at a valuation that's 5x higher than Ayr. This valuation is jarring against efforts by Ayr to optimize its operating cost base and reduce cash burn. The company has terminated its proposed $55 million acquisition of two Chicago dispensaries even as it closed the acquisition of Nevada-based cannabis cultivator Tahoe Hydroponics. The acquisition was initially proposed in 2021 and was closed with a $1.5 million cash consideration and the issuance of 232,795 Ayr common shares.
The fundamental challenge here, perhaps existential, is posed by Ayr's large debt burden. This stood at $657.8 million as of the end of the fourth quarter, only partially offset by cash and equivalents of $80.6 million. The still-rising Fed funds rate pushed up the company's quarterly interest expense to new highs of $8.4 million during the fourth quarter, up sequentially from $7.8 million and was a growth of 47.4% over its year-ago comp. Ayr's net debt burden is around 13.4x its market cap to constitute the albatross around its neck. Against this, bears have proclaimed themselves as Cassandras in that the current multiple is cognizant of a near-term future in which Ayr is no longer a going concern.
Together We Create Wonder
Hence, whether or not the current multiple can be expanded is dependent on the company's ability to manage this risk as it pushes for sustained positive operating cash flows. Indeed, the fourth quarter was Ayr's second consecutive month of positive cash flow from operations with around $500,000 generated, up sequentially from $200,000 in the third quarter and from a $5.6 million loss in the year-ago comp. This came against a $163.4 net loss in the fourth quarter, mainly driven by a non-cash asset writedown.
The earnings call for the fourth quarter was somewhat upbeat with Ayr's management stating that they are targeting generating positive operating cash flows through 2023. The company is also selling down some assets to reduce its debt burden. It disposed of its Arizona assets, three dispensaries and a number of cultivation and processing facilities, for $20 million to its original sellers. Around $22.5 million of debt will also be eliminated as part of the disposal. It's important to note that the company bought the same assets in early 2021 for $75.4 million . Bears have flagged this as a fire sale to stave off the impact of the overleveraged balance sheet.
Critically, a large amount of Ayr's debt comes due next year to set the tone for even more asset sales, possible bankruptcy, or a buyout from a larger company. The cannabis industry is stressed for liquidity so it's hard to see a larger cannabis company taking on Ayr's large debt burden here. Hence, it's hard to say what Ayr's near-term future will look like. The low multiple seems justified against a debt burden that eclipses its cash-burn green shoots.
For further details see:
Ayr Wellness: The Cannabis Debt Burden Could Be Its Undoing