Gage Growth wins “Buy” rating at Haywood

Newly public cannabis company Gage Growth (Gage Growth Stock Quote, Chart, News, Analysts, Financials CSE:GAGE) received a coverage launch from Haywood Capital Markets analyst Neal Gilmer on Monday, with Gilmer arguing that the Michigan-focused Gage should prosper in the state’s still-expanding medical and rec market.

Detroit-based Gage currently operates eight dispensaries in Michigan under the Gage and Cookies brand, with plans to reach 20 stores by the end of 2021. The company has cultivation facilities but also contracts out to cultivators from production of its exclusive brands. Management has indicated cultivation capacity, currently at about 3,000 lbs per month as of June and July, should reach 7,000 lbs per month by the year’s end. Gage has an exclusive license with Cookies, one of the most recognizable cannabis brands in the US and North America, along with an exclusive agreement with SLANG Worldwide, California-based OG Raskal and award-winner Blue River.

Gilmer said he’s impressed by Gage’s ability to command a premium average ticket size of $164 per basket compared to the state average at $85. Gilmer said that gap should persist and that the quality difference in Gage’s products will continue driving sales at its retail outlets where the company is targeting about $1 million in sales per month. (All figures in US dollars except where noted otherwise.)

“Gage provides investors with a different type of exposure to the US cannabis market with its current single state focus in Michigan,” Gilmer wrote. “The company is establishing itself as a leader in the state that features a strong adult-use program. Through a more asset-light strategy, Gage has employed a mix of contract cultivation and its own cultivation assets, mirrored with strong brand partnerships distributed across its retail locations.”

On the Michigan market, Gilmer called it robust with an educated and enthusiastic customer base where a relatively long-standing medical program (established in 2016) has combined with the state’s illicit market to lead to rapid legalized rec cannabis adoption. Michigan is currently top-five in terms of US cannabis markets but Gilmer says it could hit number three in terms of sales this year. Michigan generated nearly $1 billion in sales in 2020, which Gilmer says has grown to over $1.3 billion over the past 12 months ending in April.

“Most recent data suggests Gage is greater than five per cent of the market, that we believe will expand as the company is expected to increase cultivation capacity and retail footprint by more than double. By year-end, Gage is expected to have approximately 20 retail locations and annual cultivation capacity of 84,000 lbs,” Gilmer wrote.

As far as Gage’s operations go, the company delivered full-year 2020 results at the end of April, reporting $39.9 million in sales for the year compared to just $1.9 million for 2019. The fourth quarter 2020 featured revenue up 615 per cent year-over-year to $10.5 million. The company’s net loss for 2020 was $29.8 million compared to a loss of $75.0 million in 2019. Meanwhile, management has guided for first and second quarter 2021 revenue of $17-18 million and $26-31 million, respectively, with flower gross margin going from between 40 and 45 per cent in Q1 2021 to between 45 and 50 per cent for the Q2.

“Overall, we are well positioned to further scale our business and execute on our expansion strategy in 2021,” said Gage CEO Fabian Monaco in an April 29 press release. “We are excited to build on our momentum and are already seeing great performance evidenced by our record monthly revenue in March and seeing the trend continue into April driven by the success of our new store launches and strength of our brand in the market. We are projecting to set another consecutive monthly revenue record in May with two more store openings.”

Gage’s share price dropped right out of the gate in early April but after hitting a low of C$2.02 per share on April 20 the stock has rebounded to around C$2.60. Gilmer thinks there’s lots of upside over the next 12 months and has placed a target price of C$4.50 on GAGE with a “Buy” rating. At the time of publication, Gilmer’s target represented a projected one-year return of 73 per cent.

By his estimates, Gilmer is calling for Gage to generate 2021 and 2022 revenue of $130.7 million and $305.4 million, respectively, and 2021 and 2022 EBITDA of $15.2 million and $97.4 million, respectively.

“We expect Gage is positioned to report meaningful increases in revenue throughout 2021 and into 2022 as it expands out its cultivation capacity, both internally and contract grow,” Gilmer said. “In addition, the company should see a noticeable expansion in margins in 2021 to generate positive EBITDA, with significant margin capture in 2022 with a full year of significantly increased scale and retail presence.”