SLANG Worldwide is a buy, says Paradigm Capital

Analyst Corey Hammill of Paradigm Capital initiated coverage of cannabis CPG company SLANG Worldwide (SLANG Worldwide Stock Quote, Chart CSE:SLNG) on Wednesday with a “Buy” rating, saying that with its a scalable, low-risk business model SLANG is poised for exponential growth in the barely-out-of-the-gate cannabis derivate products market.

SLANG, which has a number of brands in the cannabis space including several in the top ten such as the O.Pen Vape brand, distributes its products through a variety of partners from Mom n’ Pop stores to larger multi-state operators in the US. The company has material operation in ten states as well as in Canada, Jamaica and Puerto Rico, amassing more than $250 million in retail sales to date, according to Hammill.

“SLANG uses a capital-light business model, licensing its wholly owned IP (hardware, non-cannabis ingredients and marketing materials) to third parties in exchange for royalties, rather than cultivating and retailing its own products,” Hammill said today’s report.

“SLANG also provides services to its licensees for corporate development, sales and marketing, finance, legal and human resources. We see this model as very scalable. SLANG plans to continue to avoid full vertical integration, estimating that the steep costs associated with cultivation and retail license acquisition outweigh the potential cost savings of being fully vertically integrated. This decision is consistent with the macro shift as more and more states are moving away from requiring vertical integration,” he writes.

The analyst predicts that SLANG will generate fiscal 2019 revenue and EBITDA of $128.9 million and $23.2 million, respectively, and fiscal 2020 revenue and EBITDA of $255.1 million and $58.7 million, respectively. (All figures in US dollars unless noted otherwise.)

Hammill declines to provide a target price but opts instead for “a directional indication of where the share price could go,” ultimately valuing SLANG with a 5x long-term revenue multiple. This process yields a near-term potential share price of approximately C$3.50 (which corresponds to a 35 per cent upside at the time of publication) as well as a four-term potential share price of nearly C$9.00.