SLANG Worldwide deserves another look, says Clarus Securities

Investors focused on the US cannabis market should be taking another look at SLANG Worldwide (SLANG Worldwide Stock Quote, Chart, News CSE:SLNG), says Clarus Securities analyst Noel Atkinson.

The analyst issued an update on the company to clients on Friday. Atkinson reiterated his “Speculative Buy” rating for the stock and $0.40 per share target, which at press time represented a projected
12-month return of 196 per cent.

SLANG Worldwide has hardware and brand IP entities for the cannabis CPG market currently sold in over 2,600 stores in the US and internationally, with brand names Organa, LBA and Firefly. The company announced on Thursday a strategic partnership with Natura Life + Science, making the latter its exclusive licensee in California for SLANG’s full suite of branded products. With one of the largest cannabis facilities in the state, Natura will help position SLANG to successfully reenter the US’s largest cannabis market, according to management.

“California presents the perfect opportunity for us to lean into our emerging markets model. By partnering with a best-in-class operator like Natura, we are confident that we will be positioned for long-term growth and success within the Golden State,” said SLANG President & CEO Chris Driessen in a press release. “Our brand District Edibles was at one point the top selling gummy product in California, and represented nearly US $2 million per month in retail revenue at its peak. We expect to achieve similar success across all SLANG brands as a result of this new partnership.”

On the event, Atkinson said he expects SLANG to obtain about five per cent of branded sales as a license fee, with first sales in California expected by mid-2021.

Calling it the latest in a flurry of new licensing agreements for SLANG (including in Massachusetts, Maine, Michigan, Ohio and Oklahoma), Atkinson wrote, “SLANG/Organa Brands suffered fierce competition in California for its key vape lines and was capacity- constrained for its edibles before Organa exited the state in late 2019. We expect California to be a relatively modest state for SLNG in the first year of launch, but the license model delivers high-margin revenue with zero operating risk,” Atkinson said.

SLANG also recently completed its acquisition of LBA Global in Oregon for $23.9 million, which the analyst says will contribute about $9 million in revenue in 2021, while “the big kahuna” of deals for SLANG, according to Atkinson, the closing of its Organa ACG purchase in Colorado, should be coming during the present quarter and should represent a key catalyst for the company.

“SLANG’s stock price has languished in comparison to the larger U.S. MSOs. This may be partly a function of smaller scale (we expect $51.5 million of revenues in 2020) and serious misses in the past on revenue guidance, but the new management team has arguably achieved more in the past few months than the prior team achieved in several years (although we realize many of these accomplishments were initiated under the prior team’s watch). This should culminate by the end of 2020 with the acquisition of Organa
ACG,” Atkinson said.

With the update, the analyst has made no changes to his estimates, calling for SLANG to generate fiscal 2020 revenue and adjusted EBITDA of $22.6 million and negative $6.1 million, respectively, and fiscal 2021 revenue and EBITDA of $55.7 million and $10.9 million, respectively. (All figures in Canadian dollars except where noted otherwise.)

“Investors focused on the U.S. cannabis market should take another look at SLANG at the current stock price,” Arkinson argued. “The Company has started its transition to predominantly generating revenues from plant-touching manufacturing and distribution operations, and the pending Organa ACG acquisition in Colorado will swing SLANG’s revenues to predominantly plant-touching. It may not be fully vertically-integrated (not having any retail stores) but it now has both cultivation (Pleasant Valley Ranch in Colorado) and a deep portfolio of wholesale processed products made in-house in Oregon and (soon) Colorado – so by the end of 2020 SLANG will be a true MSO.”

And Atkinson said the timing could be doubly good for investors, as the Joe Biden/Kamala Harris ticket has made nationwide legalization of cannabis a priority.

“We expect U.S. cannabis stocks to continue to rally into the November U.S. elections,” the analyst said. “We believe investors are looking for sectors that will benefit in a Democrat sweep of the White House and Congress, and cannabis would likely be one of those sectors. There is a strong likelihood that the Democrats would pass at least banking, payment processing, and tax reforms (i.e. a SAFE Banking Act) in 2021. We note that the House Democrats even put the measures of the SAFE Banking Act in their most recent COVID-19 stimulus bill. We do not expect full-blown federal legalization any time soon due to the U.S.’s aggressive stance supporting various international drug treaties. Interestingly, we think most MSOs would prefer that the federal government leave federal “legalization” alone – which would reinforce the state-regulated oligopolies in limited-license states – and instead have the federal government focus on removing resource-consuming restrictions on banking, payment processing and income taxes.”