High Tide is a solid double, says Beacon

Beacon Securities analyst Doug Cooper is happy with the performance of Canadian cannabis retailer High Tide (High Tide Stock Quote, Charts, News, Analysts, Financials TSXV:HITI), maintaining a “Buy” rating and $10.50/share target price for a potential return of 107 per cent in an update to clients on Friday.

Founded in 2009, Calgary-based High Tide designs, manufactures and distributes smoking accessories and cannabis lifestyle products as well as being involved in wholesaling and retailing. Cooper’s analysis comes after High Tide reported its fourth quarter financial results for the 2021 fiscal year and confirmed year-end numbers, which Cooper noted to be in line with expectations.

“This was clearly a transformational year for High Tide as it dramatically grew its footprint in Canada and established its CBD business in the United States and Great Britain subsequent to year-end,” Cooper said.

High Tide’s report was headlined by $53.9 million in revenue to produce 12 per cent sequential growth, accompanied by $1.4 million in adjusted EBITDA. Approximately 80 per cent of the company’s revenue mix came from Canadian cannabis sales at $42.9 million, including $4 million in data analytics. According to Cooper’s modelling, the revenue figure translates to approximately $400,000 per store on average.

According to Cooper, although same stores sales growth (SSSG) has been challenged due to the sheer number of dispensaries whose growth is outpacing industry sales, the company’s move to its discount membership model with its Canna Cabana stores should spur greater SSSG, albeit at the expense of gross margin.

Cooper said the Canadian market needs some consolidation, which he expects to be achieved through store closures and acquisitions. High Tide management hopes to have 150 stores by the end of 2022, with particular emphasis on growth in Ontario (42 per cent of Canadian cannabis market, 28 High Tide locations) and British Columbia (13.5 per cent market share, zero High Tide locations).

Internationally, High Tide has acquired five companies in the last eight months, giving the company an approximate $80 million revenue run-rate in the CBD and e-commerce market, doubling its run-rate from the fourth quarter of 2021.

All told, the company reported revenue of $181.1 million in 2021 with $12.4 million in adjusted EBITDA, though the report came after the expected January 31 filing date, with the company partially attributing the late filing to the ongoing pandemic.

“2021 was a very special year for our growth as we further extended and strengthened our bricks and mortar footprint as well as our online retail ecosystem as we rapidly grew our business across all three of the segments we operate in: THC, CBD and consumption accessories,” said Raj Grover, President and Chief Executive Officer of High Tide in the company’s January 27 press release. “Our continued growth in THC sales is especially impressive given the increasingly competitive Canadian retail landscape. With the launch of our innovative discount club model, which is the first of its kind in North America and is tailored to our Company’s retail ecosystem, we continue to rapidly gain Canadian retail market share.”

After confirming its year-end figures, Cooper projects the company’s 2022 revenue to come in at $335.5 million, implying a year-over-year increase of 85.3 per cent. From there, Cooper forecasts continued growth in 2023, estimating $418 million in revenue for a projected year-over-year increase of 24.6 per cent.

Accordingly, Cooper’s EV/Revenue multiple projections drop in the same period, as he forecasts a dip from 1.7x in 2021 to 0.9x in 2022, then to a projected 0.7x in 2023.

Meanwhile, Cooper forecasts a bit of fluctuation in the company’s adjusted EBITDA margin, initially dropping from the 6.8 per cent ($12.4 million) in 2021 to 4.8 per cent ($16.2 million) in 2022, then going back up to 8.7 per cent ($36.3 million) in 2023.

Despite the fluctuation, Cooper projects the EV/adjusted EBITDA margin to drop from the reported 24.8x in 2021 to 19x in 2022, with a further drop to 8.5x in 2023.

“Overall, we believe the results were solid as the company looks to establish a leading brand in the Canadian $4.5 billion retail market,” Cooper said. “While its balance sheet has improved and it does have a new credit facility, it is something we will watch closely given the company’s aggressive growth strategy and expectations of lower margins in the near-term.”

The whole of the cannabis sector has been in a year-long slide, with High Tide’s value dropping by 43.1 per cent over the last 12 months and by 10.5 per cent since the start of January. High Tide’s price has fallen off since achieving a 52-week high of $15/share on February 9, regressing to a 52-week low of $5/share on January 24.