A new deal with a major POS company for the cannabis sector bodes well for retailer Fire & Flower (Fire & Flower Stock Quote, Chart, News TSX:FAF), says AltaCorp Capital analyst David Kideckel, who in a client update on Monday said that retail not production and cultivation is the way to play the current cannabis market.
Edmonton-based Fire & Flower on Monday announced a strategic licence agreement between its wholly-owned subsidiary Hifyre and POS company Cova Software Solutions, whose technology is currently in over 500 cannabis stores across Canada and the US. The deal will see Cova provide to its customers the Hifyre digital retail platform, including the Spark Perks program and the Fastlane “click-and-collect” service, bundled with Cova’s own point-of-sale software.
The agreement will allow for the rapid commercialization of Hifyre’s platform across emerging cannabis markets, says Matthew Hollingshead, president of Hifyre.
“Cova is a leading point of sale company in emerging domestic and international cannabis markets and the Cova and Hifyre teams have worked collaboratively for more than a year now and we are excited to enter into this strategic agreement,” said Hollingshead in a press release.
Kideckel is viewing the event as a positive, saying that it could support Hifyre’s international expansion in the US market as well as strengthen the company’s advanced technology position in Canada.
“FAF remains our top pick in the Canadian cannabis retail space,” wrote Kideckel in his update. “In our view, the agreement with Cova supports Hifyre’s expansion in the Canadian and International cannabis markets and places Hifyre as the industry’s best-in-class digital retail platform. In addition, it provides a venue for FAF to monetize Hifyre’s capabilities further and increases revenues from its high-margin digital retail business segment.”
Fire & Flower, which is already up 23 per cent for 2020, is in a strong position, according to Kideckel, due to its partnership with global retail giant Alimentation Couche-Tard along with its digital capabilities through Hifyre, with the Cova deal (if proven successful over the medium to long term) standing as a further testament to FAF management’s ability to execute to strategy.
Kideckel is maintaining his “Speculative Buy” rating and one-year price target of $2.80 per share, established in a December 17, 2019, client report, which at the time of publication represented a total projected return of 211 per cent.
Fire & Flower reported its most recent quarter on December 16, 2019, where its fiscal third quarter 2019 showed revenue of $13.7 million compared to $2.5 million a year earlier and adjusted gross profit of $4.8 million compared to a profit of $1.2 million a year earlier. For the quarter, Kideckel had been expecting a top line of $12.0 million and adjusted profit of $4.3 million.
In his December report, the analyst said that FAF is facing near-term headwinds connected to regulations, industry conditions and competition, particularly with respect to the highly-regulated cannabis distribution market across the country and increased competition in Alberta’s retail market.
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