High Tide is a leader in Canadian cannabis retail, ATB Capital says

With strong growth prospects and industry-leading margins, investors should be taking a look at Canadian cannabis company High Tide (High Tide Stock Quote, Chart, News CSE:HITI).

So says ATB Capital Markets analyst David Kideckel who launched coverage of High Tide on Wednesday with a “Speculative Buy” rating and $0.60 per share target price, which at press time represented a projected one-year return of 275 per cent.

Calgary-based retail and wholesale company High Tide has bricks and mortar stores under the Canna Cabana and KushBar banners, online retail platforms under Grasscity and CBDcity along with a whole business in designing, manufacturing and distributing smoking accessories and lifestyle products via its subsidiary Valiant Distribution.

High Tide this summer announced a merger with cannabis retailer Meta Growth, a deal which would make High Tide the largest retailer in Canada by store count, according to Kideckel, who on the merger said that while it has yet to be approved by regulators (on Wednesday, Meta Growth announced the deal’s approval by its shareholders), there’s little to worry about and the analyst is assuming in his coverage initiation a successful completion of the transaction.

“Completion is subject to regulatory approvals,” Kideckel wrote. “We acknowledge there is risk to acquiring these approvals, but we consider it to be low.”

With the deal, High Tide will have 62 cannabis stores across four provinces, Ontario, Manitoba, Saskatchewan and Alberta, with the majority (42) in Alberta. That would give the firm a 4.9 per cent market share among Canada’s cannabis retailers, tops in the
business where next in line would be Fire & Flower at 3.8 per cent and Inner Spirit at 3.6 per cent.

Kideckel said the retail market will remain highly fragmented due to the regulatory landscape which involves upper limits to store ownership in many provinces. High Tide, which is waiting for approval on establishing eight stores in BC and is evaluating store
openings in other provinces, should take a healthy bite out of Canada’s growing cannabis market, according to Kideckel, where the rec market is set to grow at a CAGR of over 30 per cent over the next five years. Moreover, Kideckel says High Tide has one of the highest retail revenues per store, which shows its operational efficiency, leading to higher margins and better profitability.

“Our positive view on HITI is driven by the Company’s healthy growth outlook, keen focus on profitability, and attractive valuation,” Kideckel said. “Considering HITI’s ability to sustain a meaningful market share of the Canadian cannabis retail market and
the large addressable cannabis retail market size, we believe its core revenue stream will grow rapidly over the next five years.”

“In addition, we believe HITI’s unique approach for selling cannabis accessories and CBD in Canada and internationally improves the Company’s revenue growth outlook and provides diversification benefits. HITI’s vertically integrated business model of
manufacturing and selling accessories supports the Company’s healthy profitability profile, which is above the industry’s average. Among publicly listed Canadian cannabis retailers, HITI has the highest adjusted gross margin and the Company is the only one to report positive adjusted EBITDA over its last reported quarter,” Kideckel said.

The analyst is forecasting High Tide to generate fiscal 2020 (year end October 31) revenue and adjusted EBITDA of $80.6 million and $9.8 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $152.5 million and $26.6 million, respectively.

Macro-wise, Kideckel said he thinks the recreational market will put the wind at High Tide’s back.

“We expect the Canadian recreational cannabis market, which is HITI’s key focus, to grow rapidly over the next few years,” he added. “The historical trend of Canadian cannabis retail sales reinforces our view. Canadian monthly cannabis retail sales increased to $230mm in July 2020, implying a market size (annual sales run rate) of $2.8bn. We expect the Canadian recreational cannabis market size to rise to ~$9bn by 2025e, implying an annual growth of +30% (CAGR) over the next five years. We believe the introduction of new cannabis derivatives products and the improvement of the cannabis retail infrastructure in Canada will drive the industry’s growth.”

And despite the already established footprint HITI has in Canada, the analyst said its international ambitions also set the company apart.

“To our knowledge, HITI is the only Canadian cannabis retailer with more than 15% of total revenue coming from international markets,” he said. “We believe having revenue sources from international markets, such as the United States and Europe, provides diversification advantages as it makes revenue growth less susceptible to risks that may be specific to the Canadian cannabis market.”

And Kideckel noted that the company’s diversification continues with a data offering.

“HITI recently launched its proprietary data analytics service Cabanalytics. With the recent acquisition of Meta Growth, HITI expanded its data analytics service with more locations and gained access to data analytics platforms such as Meta Insights, MetaXtra, and NewLeaf Plus. We believe data analytics can help HITI gain valuable insights over consumer preferences and improve customer service standards. In addition, there is the potential to generate recurring subscription-based revenue from software-asa-service (SaaS) sales to other industry players, such as market research firms, LPs, brokers, etc.”