Parallel: Overlooked Cannabis MSO SPAC
Summary
- Parallel has a deal with the Ceres Acquisition SPAC expected to close this Summer.
- The company has operations in up to 6 states after the Windy City Cannabis deal in Illinois.
- The stock trades at ~2.2x 2022 revenue targets and only 7.5x Adjusted EBITDA targets.
- This idea was discussed in more depth with members of my private investing community, Out Fox The Street. Learn More »
The cannabis space remains hot, but a lot of U.S. cannabis stocks remain under the radar. The lack of access to major stock exchanges have left many a multi-state operator (MSO) relatively unknown. One such stock investors should check out is the Ceres Acquisition Corp. (OTCQX:CERAF) SPAC in a business combination with Parallel. The stock still trades close to the deal price despite substantial growth catalysts in the hot cannabis space.
Image Source: Parallel website
Ignored Deal
The U.S. MSO announced the business combination with the Ceres Acquisition SPAC back on February 22 and the deal is expected to close this Summer. The stock has a listed equity value of $1.9 billion with an expected cash infusion at close of ~$430 million, but Parallel will only have net cash balance of $92 million after accounting for $348 million of debt.
After over a month following the deal, Ceres Acquisition trades below $10.50 with the PIPE deal at $10.00. The stock traded all the way up to $15 on the news, but the excitement in the SAPC space has evaporated since the deal announcement.
Parallel operates 42 stores in 5 states with projected 2021 revenues of $447 million and adjusted EBITDA of $102 million. The company is run by Beau Wrigley of the famous Wrigley family.
The MSO operates primarily in Florida and Massachusetts with both markets targeted to reach around $200 million in 2021 sales. Pennsylvania is a key third market with 6 stores opening this year. The company has licenses in Texas and Nevada with limited revenues predicted in the near term.
Source: Parallel February 2021 presentation
Parallel just announced plans to buy Windy City Cannabis in Illinois to enter that state market. The company has four dispensaries in the greater Chicago area with plans to open additional stores in Carpentersville and Macomb in April.
The MSO is paying $100 million in cash and stock with up to $55 million in performance based earn-out payments. Windy City forecasts generating 2021 revenues in excess of $75 million, or the equivalent of nearly $15 million per store annualized. At most, the deal value is 2x 2021 sales targets.
The total company would have 2021 pro-forma revenues of nearly $525 million, but the company forecast strong growth in 2022 prior to entering Illinois. Parallel forecast 2022 revenues of $785 million and the addition of up to $100 million from Windy City would place the 2022 revenue target closer to 885 million now.
Source: Parallel February 2021 presentation
Like most MSOs focused on a few states, the MSO expects strong EBITDA margins. The current Parallel business is forecast for 2021 adjusted EBITDA margins of 23% growing to ~34% in 2022. Both EBITDA margin numbers are before factoring in the profits from Windy City.
The company has plans to enter the Georgia medical cannabis market along with New Jersey and Virginia. All of these new markets require license approvals and aren't generally factored into 2021 financial targets.
Discounted Deal Value
At a current price of $10.50, the stock only has a market valuation of $2 billion with 197 million shares outstanding before adding some 4 million shares for Windy City. The deal valuation is very discounted considering the hot MSO space where stocks generally trade in the range of 5-10x 2022 revenue targets.
Source: Parallel February 2021 presentation
The MSO plans to reach combined 2022 revenues approaching $900 million placing the stock trading at about 2.2x forward sales. Parallel would trade at ~7.5x adjusted EBITDA targets without factoring in any EBITDA profits from Windy City while organic adjusted EBITDA profits are forecast to grow by 160% in the year.
As with most SPACs, investors have to beware that forward guidance isn't guaranteed. Without Parallel providing public investors previous guidance, the market has no knowledge on the accuracy of such forecasts from the management team. Though, the best part is that investors are paying similar prices to the institutional investors buying the $10 PIPE. Until the SPAC closes, investors are guaranteed the option to redeem their shares for $10.
Takeaway
The key investor takeaway is that Parallel is another attractively priced cannabis MSO. The company must still close the SPAC in the next few months, but the deal is attractively priced here near $10 considering the catalysts in the cannabis space.
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This article was written by
Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.
Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CERAF over the next 72 hours. 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.
The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
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Comments (138)
sorry, posted on the wrong article.
Original expectation was to close over the summer.......
2 good ones, but like the $RWBYF play on the release of Q1 numbers tonight and earnings call tomorrow.
This value is very cheap for MSOs. Unfortunately, the market doesn't like SPACs these days and appears unwilling to own them until the merger is done. Just check out the rally in $SKIN. -The MSO plans to reach combined 2022 revenues approaching $900 million placing the stock trading at about 2.2x forward sales.
Uhh, any company selling THC in the US has to be OTC. They have no choice. Isn't $GRAMF focused on the tough California market? They also still have large EBITDA losses.
haven't seen any updates? Some SPAC companies release updated financials while others aren't.
maybe a few, hard to get a better value than here at $10.
Yes, what more do you want about a company expected to have a net cash position?
It won't be on the major exchanges. Mentions just the NEO Exchange.
No doubt, a Wrigley could develop some nice Cannabis 2.0 products.
Never say no downside risk. Any stock can go lower. 🤣
Was trock1 referring to:
"Until the SPAC closes, investors are guaranteed the option to redeem their shares for $10."
from your article?
$CERAF is a far better deal than the major MSOs, but you'll have to decide if its worth any tax implications of selling a stock with large gains.