Liberty Health Sciences
While we have been analyzing the progress and competition in the Florida marijuana market in our weekly recap, in this piece we’re zeroing in on Liberty Health and what investors should look out for ahead of Q3 earnings.
A Quick Look Back for Liberty Health
The following table provides a summary of key financial metrics for Liberty Health over the last two quarters.
|FY2020 Q1 (Ended May 31)||FY2020 Q2 (Ended Aug. 31)|
These results were driven by the following marijuana production and sales metrics.
|FY2020 Q1 (Ended May 31)||FY2020 Q2 (Ended Aug. 31)|
|Equivalent Price (CAD/gram)||$11.95||$11.23|
All in all, Q2 showed impressive improvements quarter over quarter. Revenues grew 93%, while gross margins improved and operating expenses dropped. This is likely partially driven by economies of scale as their new cultivation “campus” ramped production.
Although they still had negative EBITDA, the quarterly loss was reduced significantly and they generated positive operating cash flow. Their cash balance was also quite healthy after the sale of Chestnut Tree Farm.
In Q3, investors should watch revenue growth relative to growth in operating expenses. This will indicate whether Liberty Health can hold its own in the highly competitive Florida market.
In terms of per gram metrics, LHS’s per gram pricing held fairly strong as flower supply continued to enter the market. Most impressive was the fact they harvested over six times as much marijuana. This means they should have been extremely well-positioned to meet product demand in Q3.
As marijuana cultivation capacity continues to ramp in the state, investors will want to watch pricing carefully. While we don’t think the market is saturated at this time, once supply does catch up with demand, prices will fall quickly.
What Does the Florida Marijuana Data Say?
Over the quarter, Liberty Health increased dispensary count from 14 to 16. This compares to an increase of 11 to 14 over Q2. Given Q2 financials (gross margin, operating expenses) moved in the right direction over Q2, we don’t expect any surprises in Q3.
Looking at the hard data, the following graphs show Liberty Health’s sales and market share for both flower and extract categories.
Sales and Market Share for Marijuana Extracts
Sales and Market Share for Marijuana Flower
Looking at extract sales, LHS maintained relatively consistent market share and grew sales in-line with overall market growth. Clearly this isn’t where they are positioning themselves strategically.
Looking at flower sales, you can see LHS outpaced overall market sales for a number of weeks before seeing a slight dip and ultimately ending the quarter largely on par with the overall market. Surprisingly, market share all dipped near the end of the quarter.
Given the flower supply constraints, this may have been by driven by the flower production schedule from their cultivation facility.
In total, they sold approximately 41.5 million mg THC in extract form and 32,411 oz of flower. Based on an assumed price decline of 5%, we estimate revenues to be in the ballpark of $12.25 million.
This would yield a quarter-over-quarter revenue growth of 16%, on average equivalent pricing of $10.67 per gram. This pricing would be a little high compared to Trulieve’s, which is estimated to fall between $9-10 per gram. Revenue growth would also be lower than Trulieve’s, which sat at 22% QoQ.
Assuming gross margins held steady at 47% and operating costs also remained steady, EBITDA on the quarter would be positive at around $0.75 million.
At this time, we believe LHS is still at too early a stage in its growth to price based on EV/EBITDA. Looking at Price/Sales, it currently trades at 5.7x, which would reduce to 4.9x based on our estimates.
Looking at the share price performance between Q1 and Q2, the stock price jumped from $0.42 to $0.52 overnight and settled near $0.65 by the end of November. Over this time, Price/Sales dropped from 6.6x just before the release of Q2, down to 5.28x by November.
This suggests we might see some positive movement upon release of Q3 financials, but likely not as much as last quarter. Ultimately it will come down to market expectations. Unfortunately, there are no available analyst estimates to compare to.
How Could They Exceed These Numbers?
There are two primary ways Liberty Health could exceed the above estimates. The first is by realizing stronger average pricing. While we assumed a 5% decrease, even if they held perfectly flat, that would only increase revenues to $12.9 million (a $0.65 million difference).
Given the intense competition in the Florida marijuana market and the fact most players are also ramping flower production, it seems unlikely that pricing would remain flat or increase. However, it’s not out of the question.
Secondarily, if Liberty Health manages to improve gross margins or reduce operating expenses (improving EBITDA margins) then their bottom-line performance will improve substantially.
Overall, if margins are maintained, we believe this quarter will be well received by investors. Given the strong sales numbers, we don’t see why their performance would deteriorate in one quarter.
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