Beacon Securities has a “Buy” rating and a C$2.00 per share target price on 4Front Ventures Corp. (CSE:FFNT) stock
4Front Ventures is a U.S. multi-state cannabis operator and retailer, manufacturing and distributing a portfolio of more than 25 cannabis brands including Marmas, Crystal Clear, Funky Monkey, Pebbles, and the Pure Ratios wellness collection. 4Front has operations in five U.S. states: Illinois, Massachusetts, California, Michigan, and Washington.
Beacon argues that Illinois is the state in which 4Front has its most valuable asset, yet it appears to have no value reflected in FFNT’s current share price.
The brokerage firm contends that Illinois, which is the second-largest state in which cannabis is legal on a recreational level, has limited licenses that should create a sustainable supply shortage and, thus, support a prolonged positive pricing environment.
According to Beacon, 4Front has one of the 19 “Tier 1” production licenses, which allows for 210,000 square feet of canopy. The Company’s current footprint consists of 3,000 square feet of canopy but is in the midst of an expansion to 9,000 square feet. In addition, it has two storefronts, one of which is open in South Chicago and another in Calumet City, which is anticipated to be operational in early 2021.
The key to value appreciation from its square feet asset, Beacon says, is the limited license environment that should enable a sustainably positive pricing environment and capital to build-out to its maximum allowable footprint.
Beacon believes it essential to understand the Illinois environment and the value of the 19 licenses. The state has a population of 12.8 million, making it the second largest state by population, only after California, in terms of states that have passed adult-use regulation. Incidentally, 75% of the population lives in the Chicago metro area where 4Front has both a dispensary and will also have its production facility. When one considers how much canopy is needed to service a state’s population, a good “back of the envelope” calculation is 1 square foot per person of population. This metric has its basis in 4Front’s experience in Washington state. With a population of 7.6 million, Washington, at one time, had 12 million square feet of canopy, which collapsed prices to a low of $1.80/gram. Such prices could not support the operations of many producers and the amount of canopy in the state has subsequently dropped to ~8 million square feet. From 4Front’s experience in Washington, it believes that the current canopy puts the state’s supply-demand in equilibrium (ie. 1 square foot/1 person).
If we use the same canopy equation to establish a base-line capacity for Illinois, it would imply 13 million square feet. However, if we take the 19 licenses built-out to their maximum size of 210,000 square feet each, it only equates to 4 million square feet in aggregate. That is why there is such a positive bias to expected pricing in the state. Furthermore, that 4 million square feet aggregate canopy assumes that all 19 license holders will have the financial wherewithal to build to their maximum capacity, which may not be the case across the board. In any event, whether fully built-out by all license holders or not, it appears that Illinois will be under-supplied for the foreseeable future, which should naturally increase the value of those 19 licenses.
Beacon Securities estimates that if 4Front were to build that 210,000 square foot Illinois facility, it could generate $350-$400 million in annual revenue for the Company.
Thus, Beacon believes the value of 4Front’s Illinois assets should not be underestimated as reflected by the market today, and has a “Buy” rating on FFNT stock with a C$2.00 per share target price.
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