Buy pot stock iAnthus Capital for an upside of 213%, Echelon says

Second quarter results show solid traction in sales for US multi-state operator iAnthus Capital Holdings (iAnthus Capital Holdings Stock Quote, Chart CSE:IAN), according to analyst Matthew Pallotta of Echelon Wealth Partners, who in a corporate update to clients on Tuesday reviewed the company’s Q2.

iAnthus, which has presence across 11 states with markets in Florida, New York, Massachusetts, Nevada and Arizona and owns both the MPX brand and its soon-to-be-launched retail cannabis store brand ‘Be,’ announced its fiscal second quarter ended June 30, 2019, on Monday, reporting sales of $19.2 million, up 100 per cent from the previous quarter, and an adjusted EBITDA loss of $7.0 million, compared to last quarter’s loss of $5.1 million. (All figures in US dollars unless where noted otherwise.)

The company says it increased its production by 30 per cent over the previous quarter, up to 5,300 pounds of dried cannabis, and opened up five new dispensaries in Florida, putting its total there to eight as of August 27.

Hadley Ford, CEO, highlighted the company’s growing market share in Florida and plans for rollouts in New York, New Jersey and Massachusetts.

“The first half of 2019 has been an exciting time for team iAnthus, and I want to thank all of our employees, nearly 700 strong, for all of their hard work. We have integrated the MPX and iAnthus businesses, and the team effort is beginning to show in our results. MPX products are now carried in three states in over 110 stores and we’ll be adding California, Massachusetts and Florida later this year,” Ford wrote in a press release.

iAnthus Capital beats the analyst’s estimates

Pallotta says that while comparable revenues for the Q2 beat his estimates, as did IAN’s adjusted gross margins which came in at 52.4 per cent, more than doubling from the previous quarter’s 23.4 per cent, the $7.0-million EBITDA loss was greater than his and the consensus estimate of $5.5 million. The analyst noted that the company ended the quarter with $30.5 million on the balance sheet, roughly in line with his forecast of $33.7 million, while subsequent to the quarter IAN shored up its cash position with a $50-million secured debt financing in aid of the company’s buildout.

The analyst spoke of the broader drag on the US cannabis sector which has pulled iAnthus’ share price lower over the past two weeks and says that he was surprised not to see the stock react positively last week to news of the new debt financing, with terms that Pallotta calls favourable, saying that the event should have been a “fundamental catalyst” to the stock.

Pallotta says IAN is currently undervalued.

“The recent weakness in the stock price over the past two weeks since we first published on iAnthus has been, in our view, largely unrelated to any fundamental changes in the business and has also been seen in the share prices of its MSO peers. We continue to view the sell-off in MSOs as largely sentiment-driven, possibly exacerbated by some downward revisions to consensus estimates, which we feel, in many cases, were aggressive to begin with,” Pallotta writes

“Aside from changes in the expected timing of certain assets being approved to become operational (e.g., Nevada dispensaries, Florida dispensaries and adult-use approval in MA), directionally, the business operations appear to be progressing in line with our expectations. As noted in our recent initiation report, the Company is undervalued by most any metric, and even assumptions that are considerably more conservative than ours would suggest the stock is trading at a meaningful discount at current levels,” he writes.

Pallotta is maintaining his “Speculative Buy” rating and C$10.00 target price, which represented a projected return of 213 per cent at the time of publication.