Fire & Flower is a top cannabis pick, says ATB Capital

ATB Capital Markets analyst Kenric Tyghe is hot on Canadian cannabis retailer Fire & Flower (Fire and Flower Stock Quote, Charts, Financials, Analysts, News TSX:FAF). In an update to clients on Thursday, Tyghe kept his “Outperform” rating and target price $1.90/share, which at press time represented a projected one-year return of 106.5 per cent.

Founded in 2017 and headquartered in Toronto, Fire & Flower Holdings is an independent retailer of cannabis products and accessories through its 83 locations in Alberta, Manitoba, Ontario, Yukon and Saskatchewan, where the company also engages in the wholesale of regulated cannabis products and accessories. The company also has Hifyre, a cannabis retail and analytics platform.

Tyghe’s updated analysis comes after Fire & Flower announced last month the proposed acquisition of PotGuide, an online platform where users can search dispensaries, look for cannabis deals and access reviews. That announcement came after the $7.5 million acquisition of the assets of online cannabis platform Wikileaf, which according to the company gave Fire & Flower access to an existing subscriber base of approximately 225,000 cannabis consumers for its Spark Perks ecosystem.

Fire & Flower said the moves were meant to make the Hifyre digital network “one of the world’s most visited networks of cannabis websites and content platforms.”

“As Fire & Flower has grown over the past few years, we have successfully proven the value of our Hifyre data analytics retail platform and it is a great accomplishment to see the rapid success of our expanding digital strategy with the acquisition of PotGuide,” said Trevor Fencott, CEO of Fire & Flower, in the company’s August 26 press release announcing the PotGuide deal.

“Now that we are strategically acquiring two of the most visited cannabis online websites, PotGuide and Wikileaf, we have established Fire & Flower and Hifyre as leading global players in digital cannabis traffic and believe we can offer even greater value to these high-demand properties,” said Fencott.

Looking at FAF’s Hifyre, Tyghe said cannabis tech platforms provide the necessary infrastructure (e-commerce, point of sale, inventory, etc.) for retailers to compete effectively in the still-emerging industry. Further, the economics of these platforms are attractive, Tyghe said, bringing in recurring, high-margin and scalable revenue.

But the market seems to give little value at the present time to Hifyre, according to the analyst, instead viewing Fire & Flower as solely a cannabis retailer. But the hidden value in Hifyre will make its presence known as the company grows its digital revenue streams, Tyghe said.

“The Hifyre platform, owned by Fire & Flower, already includes Hifyre REACH (retail advertising network), Hifyre IQ (data analytics platform), Hifyre ONE (digital retail platform), and Hifyre SPARK (customer loyalty management). FAF has recently announced the acquisitions of Wikileaf and PotGuide, two websites that, in our view, are similar to Weedmaps and Leafly. With these two acquisitions, we believe that Hifyre (1) expands monetization opportunities by controlling top-of-the-funnel high-traffic cannabis websites; (2) increases the number of customers in its ecosystem, therefore growing its loyalty program and gathering more data; and (3) adds a white-label e-commerce offering to its portfolio, leveraging FAF’s retail network for order fulfillment,” Tyghe wrote.

Crunching the numbers, Tyghe estimated Hifyre itself could be worth about $120 million, which would equate to about one-third of FAF’s current diluted market cap.

“Considering the long runway for growth and the scalability of cannabis tech platforms, we believe that the value of Hifyre could be much higher than that, offering a potentially large upside for investors,” he said.

Fire and Flower continued making inroads throughout the second quarter, officially entering the California cannabis market after American Acres, the company’s strategic licensing partner since February, changed its name to Fire and Flower U.S. Holdings. In Canada, the company completed an exercise of A-3 warrants totalling almost $10 million with Alimentation Couche-Tard, which owns Circle K.

On the partnership front, the company announced a licensing agreement with Humble & Fume to offer an expanded catalogue of Humble’s portfolio of products to Fire & Flower customers online and in-store throughout North America.

After Fire and Flower reported revenue of $44.1 million in its fiscal first quarter 2022 results (year end February 2), Tyghe has now projected continued growth for the remainder of the fiscal year, with revenue for quarters two, three and four expected to be $46.5 million, $57.1 million and $62.2 million, respectively. Over the longer term, Tyghe estimates annual revenue of $244.3 million for fiscal 2022 and $262 million for fiscal 2023. After FAF finished its fiscal 2021 with adjusted EBITDA of $12.3 million, Tyghe projects $13.4 million for 2022 and $13.1 million for 2023.

With fiscal second quarter financial results expected on September 14, Tyghe believes the company is still a formidable industry option.

Fire and Flower’s share price shot up earlier this year but has fallen back over the ensuing months. Year-to-date, FAF is currently up about seven per cent.