4Front Ventures hit my radar a while back. I’ve covered them before but, now that I have my own place in the internet world I wanted to cover them again; they have just printed annual numbers as well as future projections. There was a solid revenue increase. More importantly, there are expectations in the form of guidance for far more significant revenue increases. Unlike other cannabis stocks, 4Front feels confident enough to not only project into the next year but, also provided total guidance of its capabilities for its current capabilities. I will look into both.
4Front started up in Washington State and has built up a solid business. In fact, they produce the best-selling edible in Washington State as well as the #2 flower product. Washington State is a highly competitive cannabis state so, that is a solid place. Now, they are taking what they have learned and pushing that to new markets with a focus on Illinois and California. Both of these states are growing rapidly.
The theory from management is cost controls and production on the lowest-cost basis. If all cannabis stocks were this way investing in these companies would be much easier. When I first heard that concept I was leery of low-quality cannabis. This notion gets immediately dismissed when you are reminded of their ranking with their edibles: #1 spot. And, wait until you see the number they printed on gross margins. Now, they are replicating the exact same methodology in all of the other areas they are moving into.
4Front’s current revenue is about $57M in total revenue with a forward projection of about $175M for the following year. They also have EBITDA projections of about $50M for the upcoming year. I am going to break these down and show how these earnings will affect the valuation of the stock price.
In the meantime, here is $FFNTF:
As you can see, unlike a lot of other cannabis stocks, $FFNTF has been drifting back upwards since the recent sell-off.
Revenue for the quarter, 4Front posted GAAP revenue of $17M:
A lot of what is happening is the scaling up of new business ventures. Washington State is in full swing, whereas the other states are ramping up. The full projections will show how much additional revenue will be added via these other enterprise journeys.
I have put together a possible revenue picture will look like from the forward given guidance of $170M – $180M:
I tried to project via a largely even outlook. Basically, this adds up to $180M in total revenues. By putting the visual together you can see how impressive this is and it gives a perspective of what is likely to occur. It may be that the first quarter’s revenue comes in below the $30M. If so, then this means another revenue bar needs to move upwards to compensate for this.
Keep in mind, this is just this year’s projections. Management has guided that they are capable of creating some $650M in production with its current footprint. This means 4Front has the capability to scale upwards. And, management also stated that with the $650M in production capabilities it will come with an accompanying $250M EBTIDA.
Gross margins are not just a highlight, but an absolute standout:
Keep in mind management’s stated concept of being a low-cost producer. Given the margins at 88%, they are absolutely succeeding in this. And, the quality of the product is certainly there if they are producing the #1-selling edible in Washington State. Now, as they move into Illinois and California, they have the opportunity to replicate the very same success.
Operating costs look to be a miss, but understanding how the metric works allows you to quickly dismiss what looks to be overly-costly total operating costs:
Whereas gross margins deal exclusively with the cost of producing one widget, total operating costs are costs associated with running the business. You will find SG&A in this metric such as Sales and the sales force, General, or costs such as the rent on a facility, and Administrative, such as salaries for individuals in management.
Total operating efficiencies are Total Operating Costs/Total Revenue. This is a percentage. As 4Front begins to scale up the two new areas, Illinois and California, total operating costs for the facilities will be incurred but there are no consequent sales yet from these facilities. All one has to do is look above to the future projections and you will see that revenues are on their way. Then, the mathematics of this metric works itself out.
Adjusted EBITDA was stated to be $5.9M for Q4 20 and FY20, or, at least in the most recent statement. I’ve not been able to find the adjustment made in the previous quarter. So, the math is questionable.
But, it is the forward EBITDA projection that has most of my attention. Management is guiding for $50M EBITDA in the upcoming year on the $180M revenue; this is what $50M EBTIDA could look like:
EBITDA shows us that the basic business structure is viable. Once a company can get to this level it is then merely a matter of higher revenue on larger volume. With economies-of-scale and marginal profits, this trickles through to net income; the ultimate goal.
Owed to a few factors from unusual expenses, net incomes were off significantly for the quarter:
Net incomes should turn positive with higher levels of revenues, as I mentioned. And, after the initial build and expenses incurred from these kinds of unusual expenses, net incomes should become more consistent over time.
In general, the average net income for the S&P 500 is about 7.5% of total revenues. 4Front has the future capabilities of some $650M in total revenues. That’s about $50M. With an average valuation of about 35x future earnings and an average increase in revenue, $FFNTF could hit about $3.50 per share. But, this is cannabis and the stock may push higher; you cannot use average future earnings multiples with an industry that is growing at some 200% YoY in revenues.
Is 4Front Ventures A Good Buy?
Is 4Front Ventures a good buy? This becomes an interesting balance between right now and the future. And, what I am most focused upon is the forward multiple. Right now, there is the immediate growth rate that the company is experience. Right now, 4Front is growing its revenue by about 200% YoY. But, should they scale up to $650M in revenue the question boils down to: At what pace did they move to get there?
Right now, we don’t need to ask that question, but it is one of those philosophical questions that eventually investors in cannabis stocks are going to have to ask. When the growth rate slows down to more normal levels in about 5 years, or so, what growth multiple should you apply then? And, where will these companies be from a basis point? For instance, I doubt seriously that 4Front ventures will stop expanding. So, the current $650M revenue capabilities may get dwarfed by even further expansion into other states.
Base Case Scenario
Let us look at the base-case scenario for 4Front Ventures for this upcoming year:
- $180M Revenue
- 75% Gross Margins
- 35% Total Operating Costs
- $72M Operating Profits
- 10% Continuing Costs
- $54M Net Earnings
- 520M shares outstanding
- $0.1038 EPS
With a 100x future earnings multiple, this puts $FFNTF at $10.38 per share.
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