US cannabis company Indus Holdings (Indus Holdings Stock Quote, Chart, News CSE:INDS) has got a lot to prove, says analyst Doug Cooper of Beacon Securities, who reviewed Indus’ latest quarterly results in an update to clients on Monday.
Cooper says the stock is still a “Buy,” however, as its greenhouse assets are finally ready to ramp and the company should be growing its top line in 2020.
With operations based in Salinas, California, and headquarters in Toronto, Indus is a vertically integrated cannabis company with cultivation, extraction, manufacturing, brand sales & marketing and distribution capabilities. The firm’s brands include Altai, Dixie, Moon, Beboe and Legal.
Indus reported its fiscal third quarter ended September 30, 2019, on Saturday, generating revenue of $10.1 million, up 94 per cent year-over-year, and $26.2 million for the preceding nine months, up 140 per cent year-over-year. EBITDA for the Q3 came in at a loss of $16.8 million, including $5.4 million in inventory write-offs. (All figures in US dollars unless where noted otherwise.)
The company added 21 new dispensaries during the quarter and now services over 500 in California. Its cash position at quarter’s end was $12.7 million, of which $10 million has been escrowed for the announced Nevada and Oregon acquisition of W Vapes.
CEO Robert Weakley said in the Q3 press release that he expected more from the quarter.
“Our projections were impacted by a cultivation contract that was not fulfilled in Q3 – we had contracted for 2,000 pounds of flower in the quarter, which did not pass our lab tests and pricing agreement, resulting in more than a $3 million negative revenue impact. At the same time, our own harvest, which we planned to have two weeks of sales in Q3, got pushed to the beginning of Q4,” wrote Weakley.
“The issues that we had with our contractors further reinforce the need for Indus to
become independent and self-sustaining for the company to achieve profitability. We
have not had an issue selling our flower and concentrates, however we have had a supply
chain issue in meeting the demand, which will be solved with the completion of our
greenhouse in 2020,” he said.
Cooper says Indus’ problems over the quarter boil down to two primary issues, namely, it didn’t produce enough product through its own greenhouse and then tried to cover the shortfall on the open spot market, which ultimately led to the inventory write-off.
“There is no sugar coating that the YTD results have badly missed expectations as has the stock price. At a current market cap of ~$15 million, the stock is pricing in significant ‘going concern’ risk,” writes Cooper.
“However, we do not believe that to be the case. In fact, a ‘return to the soil’ strategy of focusing primarily, if not exclusively, on its greenhouse assets and the flower/trim produced internally to feed its extraction equipment should result in SIGNIFICANTLY improved results,” he said.
The analyst says that he likes Indus’ flexibility due to its working capital position (no debt and $30.5 million in working capital) and he is optimistic about its greenhouse assets, which have a throughput of about 25,000 pounds of dried cannabis and could grow to 40,000 to 45,000 pounds.
Cooper says that he is changing his model to reflect a focus on revenue coming from Indus’ own assets, modelling fiscal 2020 revenue and EBITDA of $65 million and $11 million, respectively, on 25,000 pounds of in-house flower production and with revenue and EBITDA of $103 million and $30 million based on 40,000 pounds.
The analyst has paired his “Buy” rating with a reduced target of C$5.00 (previously C$22.50), which at press time represented a projected return of 694 per cent.