With revenue and margin growth coming around the corner, Indus Holdings (Indus Holdings Stock Quote, Chart, News CSE:INDS) has an “incredibly positive” risk-return, according to Beacon Securities analyst Doug Cooper, who delivered on Friday an update on the company and a review of its quarterly financials.
Indus Holdings released its fiscal second quarter ended June 30, 2019, on Wednesday, announcing record revenue of $9.7 million, a 183-per-cent year-over-year increase and 51-per-cent jump from the previous quarter. Over the quarter, Indus added 87 new dispensaries while announcing the acquisitions of CBD brands Shredibles and Humble Flower Co. The company also entered both the Nevada and Oregon markets this quarter through the pending acquisition of W Vapes and completed the renovation of its 15,000 sq ft distribution centre in Salinas, California.
“I believe we are uniquely positioned in our markets,” said CEO Robert Weakley in a press release. “The infrastructure that we built over the last few years will give us the capacity to expand within the California market, and we plan to replicate our success in the Nevada and Oregon markets and beyond. I believe we have the management team and infrastructure to execute on our plan and to position ourselves as a leader in the markets we enter with our portfolio of brands.”
Looking at the numbers, Cooper notes that the $9.7 million top line was at the upper end of the company’s guidance range ($9 to $10 million) but that gross margin came in lighter than expected at $1.6 million or 16.6 per cent (versus 21 per cent for the previous quarter). (All figures in US dollars unless where indicated otherwise.)
Cooper chalks up the lower margins over the first half of the year to both the heightened cost of procured flower and the fact that Indus had been running its greenhouse at only 35 per cent cap-utilization while under-utilizing its manufacturing and distribution assets. The analyst says that as revenue grows, scale will bump up gross margins.
“Q2 EBITDA was a loss of $3.7 million,” writes Cooper. “However, the company guided to that it expects to be EBITDA positive in Q4/FY19, not including the positive impact from the closing of its acquisition of W Vapes (which extends its breadth to Nevada and Oregon), which itself is already cash flow positive and is expected to close in late Q4.”
Cooper says that the transition to positive EBITDA will come from revenue growth and margin growth. The analyst says that Indus is “incredibly undervalued” compared to its peers. The US peer group, Cooper says, trades at an average of 16x last quarter annualized sales whereas Indus trades at 3x.
“Such a dramatic discount would seem to indicate the market is concerned about its balance sheet. However, with $25m in cash ($15m ex cash for W Vapes), minimal near-term cap-ex ($2-$3m to finish greenhouse) and cash flow positive in Q4, and W Vapes is CF positive, we do not believe this is an issue. A market multiple would imply a C$23.00 stock price,” Cooper writes.
The analyst is maintaining his “Buy” rating and C22.50 target, which implies a return of 411 per cent at the time of publication.