The turnaround is well under way for California cannabis company Indus Holdings
(Indus Holdings Stock Quote, Chart, News CSE:INDS), says Beacon Securities analyst Doug Cooper, who reported on Indus’s latest quarterly release in an update to clients last Friday.
Cooper said higher gross margins and significantly lower overhead costs are key drivers for INDS.
Indus, which is based in Salinas, California, and was founded in 2014, operates as a vertically-integrated company with cultivation, extraction, manufacturing, branding, marketing and distribution of cannabis and has multiple brand lines. Indus’ products include edibles under the Moon label, which is the third-highest revenue brand in chocolate in the state, Cypress Cannabis, the sixth-highest flower brand, and Flavor, a leading concentrate brand.
The company announced its first quarter 2020 ended March 31 results last Thursday, posting revenue that was up 47 per cent year-over-year but down 12.6 per cent sequentially to $9.4 million and an EBITDA loss of $4.5 million, better than the loss of $13.4 million for the previous quarter. (All figures in US dollars except where noted otherwise.)
In its quarterly comments, management referred to the the company’s priority job in renovating its grow facilities (which will add 110,000 sq ft of cultivation room, they said), improving operational efficiency and working towards profitability.
“The financial results reflect our strategic initiatives, are in line with what we expected, and represent an interim snapshot amidst our transition to a profitable and thriving enterprise,” said Mark Ainsworth, CEO, in the Q1 press release. “Our commitment to increase our margins, retain relationships that support that goal, and focus on driving revenue growth for company owned products are reflected in these results and will continue in the second quarter of this year.”
Overall, Cooper said the quarterly numbers were in line with expectations and showed “exceptional” progress in the company’s turnaround. Cooper said margin growth came from a higher contribution of owned brands of revenue at 55 per cent along with overhead of $3.4 million, well below the company’s high water mark two quarters ago at $9.3 million.
Cooper said Indus should be EBITDA-positive by Q4 2020.
“As Indus progresses through FY20 and the expansion of its greenhouse comes on-line, its revenue and gross margin will grow and expand materially. We continue to look for a smaller EBITDA loss in Q2 with relatively break-even in Q3 and strong profitability by Q4 when the company could be on an EBITDA run-rate of $15-$20 million,” Cooper wrote.
Cooper said Indus management is expecting to see some consolidation in California’s cannabis market and would like to take part in the M&A, a move which the analyst likes.
“We agree with this strategy as ‘asset light’ business models at this point in the cannabis life cycle do not work as there is little brand equity beyond a low retail price point, which can only be realized by owning hard assets. The Cypress brand proves that controlling the mean of production results in low cost, high THC product and even selling it at relatively low selling price can result in high volume and high profitability,” Cooper said.
With the update, Cooper has maintained his “Buy” recommendation and C$2.50 target price, which at the time of publication represented a one-year return of 166 per cent.
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