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Indus Holdings has an “incredible” opportunity in California: Beacon Securities

Indus Holdings

Indus Holdings
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Beacon Securities analyst Doug Cooper thinks the single-state approach is the way to play cannabis in California and in that capacity, Indus Holdings (Indus Holdings Stock Quote, Chart, News CSE:INDS) is ready to reap the rewards.

Cooper delivered an update to clients on Tuesday, saying California will be the place to be in 2021, where Indus already has a huge head start.

Cooper made the case for California, the largest cannabis market in the US and in the world, where legal sales could reach $11 billion. He said so far no California-focused public companies have performed well —a situation that may be giving investors a negative conception of single-state operators focused on California. But Cooper argued there’s nothing wrong with the state but rather it’s been a case of poor management and bad balance sheets that have done the damage with other companies. And on those grounds, Indus turned pro-forma EBITDA positive in June with strong operating leverage expected to drive margin improvement going forward.

Cooper wrote, “California is extremely under-invested and under-capitalized, especially versus other major adult-use cannabis states. This has created a plethora of small ‘mom and pop’ growers who lack the scale necessary to succeed in the industry and thus are likely not profitable.”

“This situation creates an incredible roll-up opportunity for a well-capitalized, well-managed company such as Indus who is already one of the state’s largest growers with 220,000 square feet (SF) and owns the state’s number six selling flower brand (Cypress).

Such a roll-up is aided by the fact that no other major cannabis company is focused on California, indicating acquisitions should be reasonably priced and very accretive,” Cooper said.

On the single-state versus multi-state operator question, Cooper compared Indus to Trulieve Cannabis, which has had success as the top dog in the Florida cannabis market, growing revenue from $103 million in 2018 to $253 million in 2019 and now is on an annualized run rate of $484 million for 2020.

Cooper said Indus is well-positioned in California to repeat Trulieve’s success in Florida, arguing that CA even has a few advantages over Florida. California is larger, for instance, has an adult as well as medical market compared to Florida’s medical-only market, has a number of well-capitalized players beyond Trulieve whereas there is no push currently by any other major well-capitalized companies into California, according to Cooper.

“We believe gaining market share in a huge (single state) market through a low-cost strategy with no major, well capitalized competition, is not only possible but likely for Indus,” said Cooper.

With the update, Cooper is maintaining his “Buy” rating and C$2.50 target, which at press time represented a projected 12-month return of 62 per cent. Cooper thinks INDS will generate fiscal 2020 revenue and adjusted EBITDA of $36.9 million and negative $5.4 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $76.7 million and $21.0 million, respectively.

(All figures in US dollars except where noted otherwise.)

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About The Author /

Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.
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