SLANG Worldwide has a 111 per cent upside, says M Partners

Consumer packaged goods company SLANG Worldwide (SLANG Worldwide Stock Quote, Chart, News CSE:SLNG) has got what it takes to compete in the growing global cannabis market, says M Partners’ Paul Piotrowski, who launched coverage of the stock on Thursday with a “Buy” rating and C$2.00 target price, representing a projected 12-month return of 111 per cent at the time of publication.

Toronto-based SLANG (formerly Fire Cannabis) had its debut on the CSE on January 29, 2019, with the stock trailing off from April onward, in step with the broader cannabis selloff. The company has a portfolio of cannabis brands (O.penVAPE, District Edibles, Bakked) and primarily generates revenue through licensing and selling ingredients, components, finished cannabis products and non-plant-touching products to a network of producers, manufacturers and distributors that SLANG does not entirely own.

Piotrowski says that the arrangement gives SLANG’s capital-light business model the power of global reach at a low cost. The analyst says that SLANG’s portfolio of brands is “among the most successful in the US,” many of which were acquired in the January 2019 acquisition of Organa Brands.

Piotrowski says  he likes SLANG’s growing footprint, which extends beyond the US (where it has products in 12 states) to countries including Canada, Jamaica, Puerto Rico, Argentina, Colombia and Greece.

SLANG Worldwide is cheap compared to its peers, analyst says…

Moreover, the analyst think the stock is cheap compared to its peers.

“The Company currently trades at 1.6x 2020 revenue versus peers at 1.8x, and 7.2x 2020 EBITDA versus peers at 10.4x. Shares coming out of lock-up, the accelerated warrant expiry and a general pull-back in cannabis have put pressure on the share price, however we believe selling at these levels is unwarranted and presents an attractive entry point for investors. At current valuations, SLANG presents a very exciting opportunity to gain exposure to one of the best-selling cannabis brand portfolios in the US, with a growing international presence,” writes Piotrowski.

Going forward, the analyst sees a number of potential catalysts for the stock, including: the closing of pending acquisitions Arbor Pacific and Lunchbox Alchemy (both expected by the end of 2019); SLANG’s exercising of its right to acquire the Organa Brands manufacturing entity ACG and distribution entity, NSH; new product launches; and continued expansion into new geographic areas.

“Our valuation is underscored by the significant premium acquirers are paying for cannabis brands and brand portfolios. Recent transactions, including Curaleaf Holdings Inc.’s acquisition of Cura Partners Inc. (owners of the Select brand) for $948.8 million (C$1.27 billion) and Cresco Labs Inc.’s acquisition of Origin House for C$1.1 billion, highlight the upside potential for strong cannabis brands. Curaleaf purchased Select for 8.1x trailing revenue (Select sold ~$117 million in 2018) and the Cresco Labs-Origin House deal valued OH at 19.6x 2020 EBITDA (C$56.2 million consensus),” writes Piotrowski.

“We believe that SLANG’s rapid growth potential and strong brand portfolio justify a 15.0x multiple on 2020 EBITDA, a ~50 per cent premium to the median of its peers,” says the analyst.

Piotrowski expects SLANG to generate fiscal 2019 revenue and EBITDA of $31.7 million and negative $11.4 million, respectively, and fiscal 2020 revenue and EBITDA of $216.9 million and $49.9 million, respectively. (All figures in US dollars unless where noted otherwise.)