iAnthus Capital gets a big target cut from GMP Securities

GMP Securities analyst Robert Fagan calls the latest financing announcement by US cannabis name iAnthus Capital Holdings (iAnthus Capital Holdings Stock Quote, Chart, News CSE:IAN) one of its most expensive to date.

In an update to clients on Monday, Fagan maintained his “Buy” recommendation but lowered his target price from C$9.00 to C$5.00.

IAnthus, which currently has operations across 11 states including 27 dispensaries, on Monday announced hat cannabis-related New York-based private equity firm Gotham Green Partners has purchased $20 million of secured convertible debentures from iAnthus as part of a larger financing plan which provides Gotham the right to purchase up to a total of $86.5 million of debentures.

The two-year notes (mature date May 14, 2021) carry a coupon of 13 per cent, are convertible at ~C$2.50/share and come with $10 million of three-year warrants at a strike of ~C$2.62 (~40 per cent OTM). (All figures in US dollars unless where noted otherwise.)

IAnthus says it will use the proceeds to advance its operations in key states such as New York, Florida and New Jersey.

“We are pleased to be working with a leading financial investor in the US cannabis sector. The new notes will allow us to build out operations in our key markets and continue to develop our retail and product brands,” said Hadley Ford, CEO of iAnthus, in a press release.  “We believe this level of support from GGP will fully fund the development of our existing assets and provide the necessary capital for iAnthus to achieve positive and sustainable EBITDA and operational free cash flow in 2020.”

Fagan says the financing comes at a relatively high price, estimated at an annual cost of 37 per cent and ranking it as one of IAN’s most expensive financing structures to date.

The analyst notes that it compares to other convertible financings announced within the US cannabis sector in the range of 20 to 30 per cent per year. Fagan points to another financing by iAnthus, a $50-million non-definitive term sheet for a senior secured loan with Torian Capital, one which he expected to have closed by mid-September but is now delayed. The analyst says that the Gotham deal likely represents iAnthus’ opting for the certainty of funding with Gotham despite its higher cost.

“We believe IAN has executed well on top-line growth, with pro-forma revenues now having reached a run-rate of ~$120 million, up 20 per cent QoQ from Q2 levels. This combined with some solid metrics seen in IAN’s Q2/19 results (3 per cent market share in Florida, 70 per cent retail penetration in MD), in our view validate the potential of the company’s platform,” Fagan writes.

“Nevertheless, we view the Gotham financing structure as having increased IAN’s cost of capital, while also potentially presenting challenges for near-term share price upside. We have reflected this by reducing our target 2020 EBITDA multiple to 8.5x from 15x prior. We believe this both recognizes IAN’s significant equity value erosion recently, while simultaneously providing an opportunity for valuation to better reflect the quality of the company’s assets, which we note could be attractive to a potential buyer at current levels,” he says.

Fagan’s new target of C$5.00 represented a projected 12-month return of 168.8 per cent at the time of publication.