Acreage Holdings, Inc. (OTCQX:ACRDF) reported its financial results on Monday for the third quarter that ended September 30, 2022 ("Q3 2022").

According to Cantor Fitzgerald's Pablo Zuanic: "We remain Neutral but increase our 12-month price target on Acreage to $1.44 from $1.28 following the recently announced Canopy Growth Corp. (NYSE:CGC) proposal."

In Zuanic's opinion, over the last year, the company has made "significant" strides in refocusing the business, improving profitability, and driving Year-over-year (YOY) growth; "we think it is well-positioned to benefit from the start of rec sales in New York/Connecticut in 2H23 and grow along with the New Jersey recreational market."

In 3Q22 macro issues and competitive challenges resulted in flat sales seq and lower EBITDA, and we expect little improvement in 4Q22.

Price Target

Cantor's price target for the company takes the current implied conversion price of $1.44. So, in its view, "Canopy Growth is getting a good deal; if we take the blended price of the floating and fixed shares, Acreage is valued at 1.5x our CY23 sales estimates vs. the MSO average of 2.2x," says Zuanic.

About 3Q22: Sales were flat seq ($61.4Mn), with New Jersey, Ohio, and Maine, all posting growth; "this growth was offset by price weakness in Pennsylvania and a market decline in Connecticut," said the analyst. In total, "retail sales ($48Mn) were up 3.5% seq, and net wholesale ($13Mn) fell 11%. Reported gross margins fell from 50% seq to 35%. Adj EBITDA dropped 15% seq to $9Mn. Net debt was mostly stable at $176Mn."

"Little was said about the outlook, but we expect little sales or profit margin growth in 4Q22," Zuanic added.

Canopy Growth Deal

According to Cantor's report, management expects holders of the Floating share class "to vote in favor of the transactions proposed by Canopy Growth, at the upcoming shareholder meeting on 1/23/23." Moreover, Canopy Growth may decide to delist from NASDAQ and remain listed in the Toronto Stock Exchange (TSX), but "we believe floating shares holders will be fine with that scenario," Zuanic noted.

Valuation and Price Target: "Holders of the floating shares (ACRDF) will receive 0.45 of CGC shares upon closing of the transaction. At the intraday (3 pm) price of US$3.20, ACRDF shares are now worth $1.44," Zuanic said.

Regarding sectoral investment risks, lack of favorable regulatory progress (state/federal); no further shift from medical to recreational in key states; loosening of licensing grants in key restricted states; and, although unlikely, revocation of existing licenses, according to the report.

Finally, "besides company fundamentals, the consummation of the Canopy USA deal will be the main driver of ACRDF shares, as well as the evolution of CGC shares," Zuanic concluded.

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