Plus Products still has big upside, PI says

Third quarter sales from Plus Products (Plus Products Stock Quote, Chart, News CSE:PLUS) were a disappointment but with one of its key competitors in the California cannabis edibles market now on the mat, look for PLUS to come out swinging in the next quarter, says PI Financial analyst Jason Zandberg.

The analyst delivered an update to clients on Monday where he kept his “Buy” rating for PLUS but dropped his target price from C$5.50 to C$5.00.

San Mateo, California, cannabis edibles maker for the medical and recreational markets, Plus Products released its third quarter financials last Friday, showing net revenues climbing to $3.5 million, a 38-per-cent increase year-over-year, with an EBITDA loss of $7.8 million compared to a loss of $1.3 million a year earlier. (All figures in US dollars unless where noted otherwise.)

Cash flow from operations was negative $7.4 million compared to negative $3.4 million in the previous quarter, while the company finished up its Q3 with $22.3 million in cash and equivalents. Over the quarter, PLUS launched its first California-wide marketing campaign while also launching its Hemp CBD product line online and nationwide.

“While our topline growth was less robust than we had hoped entering the quarter, our team has done a great job battling tough market conditions in California, maintaining a significant 21-per-cent share of the gummies market,” said co-founder and CEO Jake Heimark in a press release.

Zandberg says Plus’s quarterly revenue and EBITDA came in below his expectations of $4.5 million and negative $3.0 million, respectively, with management blaming the lack of black market enforcement by California regulators as the primary reason for the stall in revenue growth.

According to Zandberg, growth within the California market will, in fact, depend on California regulators stepping up to enforce black market penalties.

“We believe that competition is also heating up as vendors use price discounting as a means to generate sales and try to steal market share. The good news on enforcement is that one of PLUS’s top competitors had its licensed revoked for selling products into the black market. This development should provide a market share grab for PLUS,” Zandberg said.

Drilling down, the analyst says operating expenses were unexpectedly up for the quarter but that the increase was due to upfront costs associated with launching Plus’ CBD line as well as startup costs with Taproots in Nevada — both of which Zandberg expects will provide solid returns down the road.

“We expect growth to resume in Q4 as PLUS takes advantage of the vacuum left from Kushy Punch’s withdrawal, the initial sales in Nevada and the initial sales from its CBD gummy products,” he wrote.
Zandberg has lowered his forecast, calling for fiscal 2019 sales and EBITDA of $15.9 million and negative $18.0 million, respectively, and for fiscal 2020 sales and EBITDA of $51.9 million and negative $0.9 million, respectively.

His $5.00 target stems from an EV/EBITDA multiple of 6x based on his fiscal 2021 estimates (previously 4x) and represented a projected 12-month return of 166.0 per cent at the time of publication.