In a coverage initiation on May 1, AltaCorp Capital analyst David M. Kideckel said cannabis stores operated by Fire and Flower Holdings (Fire and Flower Holdings Stock Quote, Chart TSXV:FAF) address two notable deficiencies in the Canadian space, namely, available distribution channels and lack of product education for new customers.
Kideckel kicks off coverage with a “Speculative Buy” rating and one-year target of $2.50, which represents a projected return of 83.8 per cent at the time of publication.
Fire and Flower currently operates 13 licensed cannabis stores, with nine in Alberta, two in Saskatchewan and two branded stores in Ontario. The company also holds seven additional fully-built locations in Alberta which are waiting on provincial licenses, two of which are cannabis accessories stores. In July of last year, Fire and Flower acquired Hifyre, a proprietary e-commerce platform.
Kideckel points to initial sales figures across Canada which he calls “far from impressive,” saying that while some are pointing to supply shortages as the primary culprit the lack of accessible distribution channels as well as education are issues, too. The analyst sees F&F and its retail outlets — complete with in-shop cannabis experts — flourishing here.
“The Canadian recreational cannabis market has seen slower than expected growth across many provinces which we believe is attributed to various factors such as lack of supply, logistical issues from the Canadian LPs and lack of distribution. In our view, Fire & Flower is well positioned to lead the Canadian cannabis retail sector as their specialized approach to retail elucidates the fundamental issues that are currently plaguing the Canadian adult-use market, for now and in the future,” says Kideckel.
The analyst’s model assumes average annual sales per F&F store of $2.9 million initially, with growth expected as the market for cannabis-derived products gets up and running. Kideckel thinks that F&F will hit positive EBITDA by fiscal 2020 with an 12-per-cent margin that he expects will grow to 24 per cent by fiscal 2021.
For a forecast, Kideckel sees FAF generating fiscal 2019 revenue and Adjusted EBITDA of $49.4 million and negative $22.6 million. His $2.50 target stems from his discounted cash flow valuation using a 17-per-cent discount rate and three-per-cent terminal growth rate.