Fire & Flower is a triple from here, says Echelon Wealth

A new financing for Canadian cannabis retailer Fire & Flower (Fire & Flower Stock Quote, Chart, News TSX:FAF) may not be enough to fuel expansion plans in Ontario, according to Echelon Wealth Partners analyst Andrew Semple who on Wednesday provided clients with an update on FAF.

Edmonton-based Fire & Flower has cannabis stores operating in four Canadian provinces and one territory as well as the Hifyre point-of-sale data-gathering and analytics business for the cannabis industry.

The company on Thursday announced two proposed private placements for aggregate proceeds of up to $25 million, consisting of $19.8 million of secured convertible debentures and $5.2 million of subscription receipts.

FAF will use the proceeds for working capital, general corporate purposes including repayment of existing debt. CEO Trevor Fencott said the private placements will enable FAF to continue with its growth plans.

“With this capital in place, we are uniquely positioned for success coming out of the current public health crisis and well into the future,” said Fencott in a press release.

Semple said with $43 million in cash as of its most recent quarter and likely $31 million in cash on hand at the end of fiscal 2019, the new financing will bridge near-term balance sheet risks for Fire & Flower but the company will probably need more money going forward.

“In our view, this financing appears to replace the Company’s $27.2 million of convertible debentures due June 2020, unlocking its balance sheet for continued execution on upfront growth capex. However, we continue to model Fire & Flower requiring additional capital to expand at its intended pace,” Semple wrote.

“We previously stated that we expect the Company would look for $35 million in capital in 2020. While the proposed debenture financing alleviates much of the near-term pressure, we believe the Company is still looking to accept additional capital infusions, at the right price,” he said.

As to Ontario’s opening up of cannabis retail, the analyst voiced more caution, saying the timeline for regulatory approvals for new adult-use locations looks to be extended, potentially as a result of COVID-19 and emergency measures put in place calling for curbside pickup and home delivery, both of which could have a potential negative impact on near-term sales, Semple said.

“We believe it may still be premature to make estimate changes provided Fire & Flower will soon report FQ419 results (due by early May) along with a concurrent operational update,” Semple said.

“It is not yet clear when Ontario will lift emergency measures such that it may move faster or slower than currently modelled. As time progresses without the lifting of emergency measures, our view becomes increasingly skewed towards regulatory approvals taking longer than anticipated,” he wrote.

Currently, FAF has three Ontario locations scheduled to pass the public notice period by April 19.

With the update, Semple reiterated his “Speculative Buy” rating and $1.75 target for FAF, which at press time represented a projected 12-month return of 207 per cent.

Semple is calling for fiscal 2020 revenue and adjusted EBITDA of $108.7 million and negative $6.3 million, respectively.