By Stone Fox Capital @ Seeking Alpha
- High Tide remains overlooked as a Canadian cannabis player.
- The company focuses on retail stores in a market that is over-focused on cultivation and branded products.
- The stock has a market cap of only $540 million and could easily trade at just 2x actual FY22 sales.
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The Canadian cannabis space has been a tough place to invest for years now, but High Tide (HITI) has recently stood out from the crowd. The company is more focused on the retail space compared to most of the publicly traded companies with massive production facilities and branded products. My investment thesis is much more bullish on High Tide, as the Canadian market lacks retail stores providing a strong avenue for growth.
The company has 89 company locations with a plan to expand from 19 to 30 stores in Ontario by September 30. Ultimately, High Tide has a goal of reaching 200 stores and still doesn’t have any stores in British Columbia and Quebec.
As the company highlights, a retail store operator is not an LP and actually benefits from the excess supply from the LPs such as Aurora Cannabis (ACB) or Canopy Growth (CGC). In addition, without the expensive cost structure and wild expenses, High Tide has entered the U.S. hemp-derived CBD space with the acquisition of FABCBD.
Source: High Tide June 2021 presentation
Even with Canadian cannabis retail locations closed during the April quarter and not reopened until June 11, High Tide was still able to grow revenues and expand EBITDA profits. Now the sequential growth from FQ1 was limited and the company made several acquisitions, but High Tide is a breath of fresh air in a space where businesses always take a couple of steps back after making a big step forward.
The FQ2 run rate is $160 million based on a quarter with $40 million in sales and High Tide lists a pro-forma run rate of $188 million based on closed pending deals. The company is in the process of closing the deal with DHC Supply for $10.0 million and recently close the 80% acquisition of Fab Nutrition, LLC operating as FABCBD for $20.6 million.
FABCBD is a solid deal with 2020 revenues of $10.8 million and adjusted EBITDA of $4.3 million. Don’t forget, 2020 was a tough year for the CBD market due to CVOID-19 shutdown of retail locations and the lack of FDA regulations.
Unlike the large Canadian players entering the U.S. with expensive operations, High Tide slid into the U.S. via a small deal for a profitable company to build on top of another deal for Grass City last year. In addition, High Tide just started trading on the NASDAQ providing the unique opportunity to invest in a company on a major stock exchange with a decent portion of the business in the U.S.
The company could probably slide right into the U.S. market via an acquisition of a small MSO based on their experience with operating retail locations in Canada. In addition, High Tide focuses on marijuana accessory products to sell in their retail stores. The company appears to focus away from the areas where the LPs are focused limiting the competition.
Not As Cheap
Unfortunately, High Tide isn’t as cheap as the stock was back in 2020 when nobody wanted the stock for a reverse split adjusted $2. The stock is currently down over 30% from the highs to $8 following the big Blue Wave rally back in February.
High Tide has ~64 million outstanding shares as of June 25 for a $540 million market cap. Based on the pro-forma revenue run rate of $188 million, the stock trades at less than 3x current sales.
Analysts have FY22 revenues reaching $240 million, but the number doesn’t appear current with the new acquisitions and the growing business. The company plans to add 13 new stores in Ontario alone by September and High Tide just added another store in Alberta. For now, the Canadian cannabis market still appears underserved with only 4.1 stores in Ontario per 100,000 people.
At $8, the stock could easily trade at just 2x actual FY22 revenues. No stock is without risks. At some point, the Canadian cannabis market could flip into an oversupply of stores favoring the large LPs with the supply of new product and pressure margins on retail operators clamoring for supply.
High Tide only had ~$29 million in cash on hand at the end of April. The company added another $20 million back in mid-May, but the finances of the company are nowhere close to those of the major LPs.
The key investor takeaway is that High Tide is uniquely positioned in the Canadian cannabis space and quickly moving into the U.S. CBD space. The company isn’t without risk, but the stock is attractively positioned in the cannabis market with an appealing stock price.
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