Indus Holdings gets big price target raise at Beacon

Indus Holdings (Indus Holdings Stock Quote, Chart, News, Analysts, Financials CSE:INDS) is lining up to potentially be the largest cannabis cultivator in the United States.

That’s the word from Beacon Securities analyst Doug Cooper who delivered an update to clients on Thursday where he kept his “Buy” rating while giving his price target a boost from C$3.00 to C$5.00.

Cannabis stocks continued to do well in Thursday trading as the market reacts to news of a now Democratic-controlled US Senate, which could be favourable for cannabis reform at the federal level. Indus has benefitted, climbing 18 per cent in the last two days.

Indus is a vertically-integrated cannabis company focused on California and based in Salinas, California. The company’s brands include Cypress and House Weed. On Thursday, Indus provided an update on its expansion plans, saying it has signed a new letter of intent for a land-lease deal for cannabis production, one which involves a planned buildout to between 250,000 and 320,000 sq ft of greenhouse operations but could ultimately accommodate almost 1.5 million sq ft of modern mixed-light greenhouses.

Indus had previously announced (November 18, 2020) an LOI to retrofit a 300,000 sq ft greenhouse in Monterey County but has now nixed that plan in favour of constructing its own purpose-built, state-of-the-art cannabis cultivation and processing facility to “combine modern technology with an industry-leading cost-structure to produce the highest quality cannabis.”

“While the Company had previously been in discussions regarding a handful of retrofit greenhouses, Indus now anticipates approximately a twelve-month construction cycle that will yield one of the largest cannabis campuses anywhere in the world. After careful consideration of its options, Indus has decided to pursue construction of a new, purpose-built facility that is nearby to its existing operations,” the January 7 press release said.

In his update, Cooper said the new plan looks preferable, calling it “bigger, better, cheaper and will make the company a major player both in California as well as the US if/when inter-state trade barriers fall.”

Upon completion, Cooper says the proposed facility (which is expected to begin construction in the next 30-45 days and with a total time of 12 months) would effectively make Indus the largest cultivator in California at a combined square footage of 520,000 sq ft, which, Cooper estimates could generate over $200 million in revenue and EBITDA around $60 million.

“Perhaps even more interesting is its ability to become a two-million-plus sq ft behemoth capable of having a 15 per cent-plus market share in CA but also an exporter to other states as cannabis regulations evolve and inter-state barriers fall,” Cooper wrote.

“To this point, yesterday’s Senate race makes Chuck Schumer the Senate Majority leader. He is much more likely to bring cannabis reform to the floor for a vote. If cannabis is federally legalized, we believe inter-state commerce is a natural extension,” he said.

The analyst said that while he has not yet launched on a 2022 forecast for Indus, he is raising his target to reflect his upward bias coming from the LOI. Cooper is calling for full 2020 revenue and adjusted EBITDA of $44.7 million and negative $6.3 million, respectively, and 2021 revenue and EBITEA of $76.7 million and $21.0 million, respectively. At press time, Cooper’s C$5.00 target represented a projected 12-month return of 178 per cent. (All figures are in US dollars except for where indicated otherwise.)

“We continue to believe that low-cost cultivation is the ultimate key to success as such costs are passed along to the consumer. While some may talk of the importance of ‘brands,’ we believe that LOW PRICE is the ultimate brand that results in significant market share. Indus has already proven this strategy though its Cypress brand and greater scale (especially in a new build) will offer even greater potential for higher yields and thus lower costs. With the potential for two million-plus sq ft of cultivation in the ‘bread basket’ of cannabis, no company may offer investors a better combination of strategic market positioning and cheap valuation,” Cooper said.

Last month, Indus closed on a C$34.5-million public offering of 23 million unit at C$1.50 per unit each of which is comprised of one subordinate voting share and one-half of one share purchase warrant exercisable until December 21, 2023 at a price of C$2.20 each. The company said it will use the proceeds on its proposed additional California cultivation and production facility along with working capital and other general corporate purposes.

Indus last reported its quarterly financials on November 9 where its third quarter 2020 featured revenue up 40 per cent year-over-year to $14.1 million and EBITDA of $2.3 million compared to negative $3.9 million for the previous quarter. On December 3, Indus provided updated fourth quarter guidance which called for revenue between $9.5 and $11.5 million, down from previous guidance of $14 million, with management saying the drop is temporary and that it stems directly from lower cultivation yields due to wildfires in late summer and early fall which impacted yields more drastically than previously anticipated.