Fire and Flower will be Canada’s cannabis retail leader, says Echelon

Expected to reach over 100 retail locations by 2021, Fire and Flower Corp (Fire and Flower Corp Stock Quote, Chart, News TSX:FAF) is the best-positioned business to emerge as Canada’s cannabis retail leader, says Matthew Pallotta, analyst for Echelon Wealth Partners.

On Thursday, Pallotta launched coverage of the stock with a “Speculative Buy” rating and $2.00 target price, representing a projected return of 59 per cent at the time of publication.

Edmonton, Alberta-based Fire & Flower currently has 28 operational dispensaries across four provinces, the second-largest owner-operated network in Canada, with licenses to open three more locations. In addition to its bricks-and-mortar, the company is licensed in Saskatchewan for online sales and home delivery as well as to provide wholesale distribution from Licensed Operators to both its own and third-party dispensaries.

Pallotta says that with the retail market still lacking in stores, FAF is poised for growth.

“The Canadian marketplace remains drastically underserved by legal dispensaries, particularly in markets such as Ontario, which present the most significant growth opportunity for Fire & Flower. We forecast the Company exiting FYE 2019 with 39 locations, reaching 101 locations by FYE 2021. We expect the Company’s growth trajectory to result in FAF owning the largest network of licensed cannabis dispensaries in the country, and one of the largest (by number of locations) globally,” he writes.

Fire & Flower also owns Hifyre, a data gathering and analytics business for the cannabis sector, which has allowed it to develop a digital ecosystem, says Pallotta, integrating its data collection, analytics, point-of-sale, ERP and consumer experience functions.

“While the internal functionalities offered by the platform, additional opportunities for monetization of Hifyre’s capabilities though data analytics, and licensing of its technology offer significant optionality to the business model which we believe is unique to Fire & Flower amongst its competitors in cannabis retail. As such, we believe this optionality supports a higher multiple for Fire & Flower relative to its peers. We estimate the Hifyre platform could be worth as much as $0.20/shr for Fire & Flower stockholders,” he writes.

As well, FAF has recently (August 2019) closed a strategic investment from Couche-Tard, one of the world’s largest convenience retail businesses. The $26-million initial investment could jump to as much as $370 million or higher, with Couche-Tard potentially holding a 50.1-per-cent ownership stake.

The analyst notes that FAF is already financed to continue growing its footprint into fiscal 2021. As for valuation, Pallotta thinks that a strong retail business with growth prospects like FAF’s should reasonably trade at between 1.5x and 2.0x EV/forward sales (without capitalized leases included as debt in the capital structure).

Looking ahead, Pallotta says the most significant catalyst should be clarity surrounding the timing and extent of licensing for new dispensaries in Ontario’s next round of licensing, as growth of the company’s network in Ontario (for which it is adequately capitalized) remains the largest value driver for the business, according to Pallotta.

The analyst is forecasting 2019 revenue and adjusted EBITDA of $55.8 million and negative $10.3 million and 2020 revenue and adjusted EBITDA of $145.0 million and $7.8 million.