High Tide Has an Upside of 119 Per Cent, ATB Capital Says
March 21, 2022

By Geordie Carragher @ Cantech Letter

ATB Capital Markets analyst Frederico Gomes believes High Tide Inc. (High Tide Stock Quote, Charts, News, Analysts, Financials TSXV:HITI) continues to gain momentum, maintaining an “Outperform” rating and target price of $13.25/share for a projected return of 119 per cent in an update to clients on Thursday.

Founded in 2009 and headquartered in Calgary, High Tide Inc. operates as a vertically-integrated company in the cannabis market in Canada, the United States, and internationally. It engages in the design, manufacture, and distribution of smoking accessories and cannabis lifestyle products, and is also involved in the wholesale and retailing of cannabis products, as well as operates and franchises licensed retail cannabis stores.

Gomes’s latest analysis comes after High Tide reported its first quarter financial results for the 2022 fiscal year.

High Tide’s highlight for the quarter came in the form of $72.2 million in net revenue, slightly beating the projections set out by both ATB ($69.9 million) and the consensus ($70.3 million) while providing sequential growth of 34 per cent and a year-over-year increase of 88.5 per cent. Gomes attributed the jump to the integration of High Tide’s recent acquisitions along with its overall performance in Canada, where same-store sales increased 13 per cent sequentially on account of its shift toward a discount club model.

High Tide’s adjusted gross margin also provided a source of optimism, as it remained relatively flat at 31.8 per cent compared to 32.6 per cent in the previous quarter. Gomes pointed to contributions from higher-margin international sales (70 to 75 per cent) and higher-than-expected margins in Canada (16 per cent compared to the expectation of 12 to 13 per cent) as catalysts for the margin.

“We believe the results validate HITI’s strategy of gaining market share in Canada through store expansion and aggressive pricing while leveraging the profitability generated by its diversified US CBD and accessories platform,” Gomes said.

Another source of strength for the company in the quarter came from its adjusted EBITDA, with its $3 million report providing a significant beat on the $700,000 consensus estimate, as well as the $800,000 projection from ATB Capital Markets.

“We continue to execute on our business plan quarter after quarter by strategically expanding our business in Canada and internationally through organic growth and accretive M&A across our diversified ecosystem,” said Raj Grover, President and Chief Executive Officer of High Tide in the company’s March 17 press release. “Our forward-thinking approach makes us a leader amongst our peer group in Canada, as we keep introducing innovative retail concepts such as our discount club model, while remaining agile and pivoting quickly when needed due to the constantly evolving dynamics in the global cannabis landscape.”

All told, the company ended the quarter with $10.6 million in cash and equivalents, with a $3.9 million cash burn leading to Gomes’ belief that High Tide will need to rely on additional financing, including approximately $39.2 million in the company’s ATM.

The new quarterly results have prompted Gomes to make minimal changes to some of his forward-looking financial projections, as he now forecasts the company to hit $330 million in revenue for 2022 (previously $329.4 million) for a potential year-over-year increase of 82.2 per cent. Looking ahead to 2023, Gomes has slightly raised his projection to $451.6 million (previously $446 million), suggesting a year-over-year increase of 36.8 per cent.

From a valuation standpoint, High Tide appears to be closer to getting in line with its peers as Gomes forecasts the company’s EV/Sales multiple to drop from the reported 1.6x in 2021 to 0.9x in 2022, which puts it closer to the peer group average of 0.7x.

Meanwhile, Gomes forecasts the company’s adjusted EBITDA margin to be wider than previously expected for the coming year, setting a margin of 4.1 per cent with $13.5 million in adjusted EBITDA for 2022 (previously $9.7 million and a 2.9 per cent margin). However, he lowered his expectation for 2023, setting a margin of 7.5 per cent with $33.8 million in adjusted EBITDA (previously 8.1 per cent and a $36.1 million projection).

Similar to the EV/Sales, Gomes sees the company’s EV/EBITDA ratio coming closer to its peers moving forward, as he forecasts a drop from the reported 23.7x for 2021 to a projected 21.9x in 2022, a small step the Canadian retailer group average of 19.8x.

High Tide’s stock price has found some shallow waters in recent times, as it is down 51.3 per cent over the last 12 months, and 1.6 per cent since the start of 2022. High Tide was riding a 52-week high of $13.20/share on March 31, but it has steadily declined since then, dropping as low as $4.94/share on March 7.