High Tide is a takeout target, Bruce Campbell says

The stock is down by half since earlier this year but Canadian cannabis retailer High Tide (High Tide Stock Quote, Charts, News, Analysts, Financials TSXV:HITI) should be on your radar, says portfolio manager Bruce Campbell. Campbell thinks High Tide’s expansion efforts into the United States could be a big deal and the company represents a perfect takeover target, as well.

“High Tide is in the cannabis business but in a different niche as they’re on the retailing side,” said Campbell, president of StoneCastle Investment Management, who spoke on BNN Bloomberg on Friday. 

“We do have a lot of interest in what they’re doing in the US but also in Canada. The management team is, what do they say, a 20-year overnight success They’ve been grinding it out in the cannabis business on the accessory side for quite a number of years and now they’re having a lot of success on the storefront side as well,” Campbell said. “They’re one of the larger retailers in Canada and now they’re moving into the US where there’s a huge opportunity to consolidate and also to grow.”

Calgary-headquartered High Tide has cannabis retail outlets under the Canna Cabana, Meta Cannabis Co. and NewLeaf Cannabis brands along with wholesale operations under Valiant Distribution in smoking accessories and lifestyle products and, finally, a range of online retail platforms. Now with 101 stores and counting across Ontario, Alberta, Manitoba and Saskatchewan, the company also has investment from a number of cannabis names including Tilray and Aurora Cannabis.

High Tide announced on Monday the securing of a revolving credit facility for up to $25 million with ATB Financial at an interest rate of less than six per cent per year. 

CEO Raj Grover said the non-dilutive financing is a validation of the company’s better-looking financial profile, which currently sits at an outstanding debt balance of $27.4 million with just $1.6 million maturing over the next 12 months.

“This is great news for our shareholders as this credit facility provides us with the firepower to continue our business growth and acquisitions of quality businesses, which are synergistic with our overall ecosystem, while limiting the dilution of our existing shareholder base. We also expect the facility amount to increase in the future as our EBITDA increases, allowing us to realize arbitrage opportunities through accretive acquisitions while limiting the dilution necessary to fuel expansion,” Grover said in a press release.

High Tide has made a number of M&A moves in recent months, including selling off its KushBar assets in July while buying up five stores in Saskatchewan and closing its purchase of US-facing online retailer DankStop in August. Earlier this month, HITI bought 80 per cent of Enigmaa, a UK-based direct-to-consumer CBD business for about $15.5 million. Other recent developments for the company included a 15:1 share consolidation in May and inclusion on the NASDAQ starting in June.

“Beyond our bricks and mortar organic growth, we doubled down on more accretive e-commerce acquisitions last quarter, in the consumption accessories and hemp-derived CBD space, with a particular focus on the US market,” said Grover in High Tide’s fiscal third quarter 2021 press release, delivered on September 14. 

“With these acquisitions our portfolio now includes three of the top five most popular online platforms for consumption accessories in the world. I remain excited about our e-commerce pipeline and look forward to sharing more good news on the M&A front in the very near future,” he said.

As for its share price, along with much of the sector, High Tide’s stock shot up over the end of 2020 and the start of this year, going from about $2.50 in November to as much as $15 by early February. But the cannabis space has endured a big pullback this year, which has taken HITI for a ride as well. The stock currently trades around $7.00, making for a still very attractive year-to-date return of 83 per cent.

Campbell says he’s wait-and-see on High Tide for the moment.

“It’s not one that we own right now but we are watching very carefully to see exactly how they execute in the US and what will be the pieces that come together,” he said. “We think that High Tide is definitely a takeover target in the future as they continue to accumulate stores in Canada and now they have a US strategy as well.”

High Tide saw revenue climb by 99 per cent year-over-year during the company’s fiscal third quarter, hitting $48.1 million for the three months ended July 31, 2021, while gross profit rose by 75 per cent to $16.7 million and adjusted EBITDA was $1.5 million compared to $3.4 million a year earlier.

High Tide’s Q3 revenue included $9.6 million in US sales compared to $5.7 million for the previous quarter, with overall $46.3 million of the quarterly revenue coming from retail operations versus $1.8 million from wholesale.