Liberty Health: A Turnaround Story In Florida Medical Cannabis

Liberty Health: A Turnaround Story In Florida Medical Cannabis

Note: Liberty Health operates in Florida but reports its earnings in Canadian dollars. All currencies herein are Canadian dollars unless otherwise noted.




Source: The Growth Operation based on data from the State of Florida.

Summary

Liberty Health (OTCQX:LHSIF) is a medical cannabis company which operates in Florida. It has 19 dispensaries across Florida with plans to add eight more in the next four months. Thirteen months ago, the company only had four dispensaries.

Liberty has been exceptionally successful in selling flower: It sells the second most flower in the state and its stores sell the most flower/store of any Florida operator.

Liberty remains a turnaround story. The company costs ~twice as much as Florida competitor Trulieve (OTCPK:TCNNF) based on EV/EBITDA. However, Liberty has more room to improve as Trulieve’s margins are already 42% while Liberty is earning only ~9% margins.

Improving cash position




Liberty Health issued convertible debt near its price peak. Source: TMX Money.

Liberty Health’s financial footing was shaky but is improving. In May, it had only C$5 million in cash with US$12 million in secured convertible debt from a 2017 debt offering. Those notes mature in November 2020 and convert at a price 4x higher than Liberty’s stock price, likely requiring repayment in cash. Liberty’s falling share prices will tend to make an equity raise more difficult and costly.




Source: Author based on company filings.

Liberty Health’s capital position has been bolstered by improving cash flow and the sale of non-essential assets. The August quarter, with results announced Oct. 31, was the first in company history where it generated positive operating cash flow. However, most of the improved cash position came from the sale of an older cultivation facility and a 50% interest in an Ohio dispensary for US$14.75 million. That cultivation facility was no longer needed as the company is focused on expanding its Liberty 360 Innovation Campus.

Growth




Source: Author based on data from the State of Florida. This chart shows only the top six companies in flower sales per store.

Liberty Health is growing rapidly through strong flower sales and adding more stores in Florida. The company’s stores are some of the most efficient in Florida: Liberty sold more dry flower per store (nearly 158 oz/week per store) in October than any other Florida cannabis company and ranked second in total dry flower sales. Its sales of cannabis concentrates are relatively modest in comparison: LHS is fifth in THC concentrate sales and seventh in THC sales per dispensary. I estimate that Liberty’s stores rank third in revenue per store, behind Trulieve (OTCPK:TCNNF) and privately-owned AltMed.




Source: Author based on company filings.

Liberty Health is aggressively opening new stores. A little over a year ago, the company had only four stores but have grown to 19 stores with the most recent opening in Pensacola. This expansion will continue: Management expects to have 24 and 27 stores open by December and the end of February, respectively. These targets are lower than they were last quarter, when management expected 25 and up to 30 stores, respectively.




Source: Author based on company filings.

This quarter, Liberty Health generated C$10.6 million of sales, up 93% sequentially and up 379% over last year. Sales peaked in August 2019 when Liberty sold $4.6 million of cannabis. Gross margins grew 7 percentage points to 47% before fair value adjustments and the company expects to see further improvements in coming quarters.

This increase was the result of opening more stores and selling more cannabis. Liberty’s cannabis cultivation and sales more than doubled sequentially, rising to 3,426 kilograms grown and 947 kilograms sold. Liberty began full production at its Liberty 360 facility in Gainesville in mid-2019, leading to this increase in cannabis cultivation.

Profitability




Source: Author based on company filings.

Liberty Health has moved to profitability for the first time on several metrics due to increasing revenue and declining operating costs. Operating costs fell 29% in the quarter to $5.4 million. Most of this decline is due to an accounting quirk: Share-based compensation fell from $1.3 million last quarter to a recovery of $0.7 million this quarter.

During the quarter, Liberty generated $1.5 million in operating cash flow and an EBITDA profit of $0.5 million. For its part, the company reported an adjusted EBITDA profit of $13.8 million, but that figure includes the one-time gains from selling its Chestnut Hill property and its stake in Mad River Remedies.

Looking forward

Liberty Health has 19 dispensaries in Florida after the opening of Pensacola. The company plans to have 24 dispensaries by December and 27 dispensaries by February, although both those figures have declined since last quarter. These added stores will contribute to continued revenue growth.



Source: Author’s estimates.

Based on cannabis sales through Oct 24, I estimate that Liberty will generate ~$16-17 million in revenue in its Nov. 30 quarter. Assuming gross margins of 50% and normalized operating costs, Liberty’s EBITDA may improve to about a $1.5 million profit. Liberty trades at an enterprise value of about $160 million (345 million shares at C$0.49/share), so this suggests Liberty trades at about 26x EBITDA. This is more expensive than Trulieve, which trades at about 12x EBITDA. However, Liberty also has much more room to improve given its much lower EBITDA margin.

Liberty Health is a turnaround story. Share prices fell after December 2018 short-seller allegations and never recovered. This quarter is a step in the right direction. Liberty continues to sell flower exceptionally well in Florida and has turned the corner to profitability, partly due to accounting quirks from negative share-based compensation. Shares look expensive compared to Trulieve based on current results, but Liberty can improve significantly more as EBITDA margins expand.

Liberty Health will continue to be a turnaround story, but investors will see great returns if the company can continue growing and improving its margins.

Happy investing!

Disclosure: I am/we are long TCNNF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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