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

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.)