Roth Capital analysts increased their target price on shares of KushCo Holdings Inc (OTCQX:KSHB) to $2.25, while reiterating their Buy rating, saying the company’s 1Q 2021 financial results displayed progress on key initiatives with operating fundamentals moving in the right direction.
The analysts noted that KushCo’s revenue of $26.8 million was in line with its lowered estimates and the company managed positive $0.5 million in adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, or AEBITDA), despite industry challenges that impacted its gross margins.
“Despite the headwinds associated with shipping delays, COVID-19 and supply chain interruptions, KSHB managed to publish sequential revenue growth and continued positive AEBITDA margins,” the Roth Capital analysts wrote.
READ: KushCo Holdings announces record December sales of $14.7M and raises its FY2021 revenue guidance
They added: “We believe management saw a ~200-300bp decline in its gross margins attributable to COVID-related supply chain issues but this was mostly offset by continued expense reductions and sequential revenue growth. KSHB also called out December as its most successful quarter at ~$14.7M and we believe the business continues to deeply align with large, reputable clients (90% of sales from its top-100 clients) who are capitalizing on industry strength.
"We believe as the company’s revenue growth rate normalizes post-COVID-related issues, its expense structure and leaned out business model will drive bottom-line growth. We also view the current trading multiple of 0.6x 2021 sales represent a material discount to the potential prospects of the business and believe the company can easily trade up into the 2.0x range.”
The Roth analysts also raised their 2021 revenue estimates for KushCo Holdings to $142.3 million from $136.5M and AEBITDA to $6.9 million from $6.7 million, citing the continuing state medical and recreational sales strength along with the addition of new adult-use legislation in Arizona and New Jersey.
They added that they anticipate some additional sales hires by KushCo in the near term to service its expected client growth on the horizon.
“We believe the consolidation of MSOs (multi-state operators) and LPs (licensed producers) benefits KSHB and believe this should be a transformative year when the business turns the corner from a top-line growth standpoint,” the analyst wrote.
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