High Tide price target doubled at ATB Capital
February 25, 2021

Author / Nick Waddell

It’s double your pleasure with High Tide (High Tide Stock Quote, Chart, News, Analysts, Financials TSXV:HITI), according to ATB Capital Markets analyst David Kideckel, who in a Tuesday update to clients raised his target on the stock from $0.60 to $1.20 per share, saying the cannabis retailer is poised for growth.

High Tide is a Calgary-based retail and wholesale business with now 70 bricks and mortar stores across Canada, online retail platforms and a wholesale business in designing, manufacturing and distributing smoking accessories and lifestyle products through its subsidiary Valiant Distribution. Through the company’s recent acquisition of Meta Growth, High Tide is now the largest cannabis retailer by revenue in Canada, while its CBD and accessories business in the United States currently makes up a little under one quarter of HITI’s revenue.

The stock has seen a surge in recent months taking it from $0.20 in December to now in the $0.70-$0.80 range. But there should be more upside, according to Kideckel.

“Our positive view on HITI is driven by a healthy growth outlook and attractive valuation. Considering HITI’s ability to sustain share in the Canadian cannabis retail market, we believe the Company’s core revenue stream will grow rapidly over the next years,” Kideckel wrote.

“We note that HITI also has growth optionality stemming from its international sales of accessories and CBD, notably in the US. We estimate that the stock is trading at an attractive FY2021 EV/Revenue of 3x compared to Canadian LPs (16x for large-caps and 7x for mid-caps) and US MSOs (8x for large-caps and 6x for mid and small caps),” he said.

Ahead of High Tide’s fourth quarter results due on March 1, the company provided preliminary revenue guidance on February 18, saying its fiscal Q4 ended October 31, 2020, would be ahead of the range of analysts’ estimates of between $23.3 million and $24.2 million, while gross margin percentage should be stable with that of the first nine months of the fiscal year. HITI said its full fiscal 2020 revenue should also be ahead of analysts’ estimates of between $79.7 million and $80.6 million.

Kideckel has updated his estimates and is now calling for Q4 2020 revenue of $24.9 million (previously $24.2 million) and adjusted EBITDA of $3.2 million (previously $4.5 million). For the full fiscal 2020, the analyst is estimating revenue and adjusted EBITDA of $81 million and $9 million, respectively, fiscal 2021 revenue and adjusted EBITDA of $162 million and $24 million, respectively, and fiscal 2022 revenue and adjusted EBITDA of $243 million and $46 million, respectively.

“We have increased our revenue estimates considering not only HITI’s preliminary guidance, but also the continued growth in Canadian cannabis retail sales and the acquisition of SMCK in the US,” Kideckel wrote.

“We have decreased our EBITDA margin estimates over the near-term due to our expectations regarding acquisition integration costs (META and SMCK) and the impact of COVID-19 (e.g., higher costs for delivery). Considering HITI’s significantly improved balance sheet and the improved liquidity on the stock, we have decreased our discount rate from 16 per cent to 15 per cent,” he said.

With the update, Kideckel has retained his “Speculative Buy” rating for HITI with the new target of $1.20, which at press time represented a projected 12-month return of 54 per cent.

“Our higher price target is driven by our lower discount rate and higher long-term revenue estimates, partially offset by the Company’s increased fully diluted share count given HITI’s equity raises and debt conversion,” Kideckel said.

Concerning its balance sheet, High Tide closed on Monday on a $23-million bought deal including over-allotment, issuing a total of about 48 million units at $0.48 per unit (each unit being one common share and one-half of a warrant) for proceeds of $23 million. HITI says the proceeds will go towards opening more retail outlets, M&A activity and general corporate and working capital purposes. The company has also announced the conversion of debt totalling about $27 million in debt into common shares.

For investors, Kideckel said major catalysts on HITI would include continued expansion of its retail footprint, better visibility on its international retail sales of CBD and accessories, improved regulatory outlook in Canada for cannabis retail and its listing on the NASDAQ.

HighTide announced on February 10 the opening of its 70th retail location in Canada, a rec cannabis store under the Canna Cabana brand in Calgary.

“The new store is part of our strategic plan to build scale and drive revenue growth by selectively opening new locations in neighbourhoods that aren’t over saturated with existing cannabis retail options,” said Raj Grover, President and CEO, in a press release.

“As with all stores operating under the High Tide umbrella, this new location will follow our exclusive one-stop shop approach that allows consumers to purchase all of their cannabis and accessory needs under one roof,” Grover said.