Fire & Flower is undervalued, says Echelon

Echelon Capital markets analyst Andrew Semple is cautiously optimistic about Fire & Flower (Fire and Flower Stock Quote, Chart, News TSX:FAF), reiterating on Thursday a “Speculative Buy” rating and $5/share target price for a projected return of 35.1 per cent.

Toronto-based Fire & Flower is an independent cannabis retailer and wholesaler in Ontario and Western Canada and it operates the Hifyre digital retail and analytics platform for the cannabis space.

Semple’s latest analysis comes after Fire & Flower made a change at the top of its executive ladder, with company founder Trevor Fencott stepping down from his role as CEO and from the company’s board, with Stephane Trudel, Senior Vice President of Operations at Alimentation Couche-Tard, having assumed CEO responsibilities on June 1.

“We spoke collectively with both Mr. Trudel and Mr. Fencott following the announcement, and from that conversation we understood that much of the Company’s current strategic direction will remain on course,” Semple said. “However, there is a desire to reach for business improvements. We heard greater emphasis on improving operations and collaboration between segments, as well as a goal to drive the Company towards higher earnings and cash flow.”

In connection with the appointment, Trudel resigned his roles within the Board’s audit, corporate governance, and compensation committees, and will resign from his roles at Couche-Tard upon completion of his transitional duties.

“I am delighted to be assuming the role of Chief Executive Officer of the Company and to continue building the leading platform in the cannabis retail and technology sectors”, Trudel said in the company’s June 1 press release. “This is an important time in the development of our Company and I am looking forward to working with the rest of the management team and the Board to drive the Company’s growth and shareholder value.”

The appointment also comes one month after Alimentation Couche-Tard exercised its Series B warrants in Fire & Flower, increasing its ownership to approximately 35.3 per cent, with outstanding Series C warrants having the potential to give Alimentation Couche-Tard majority ownership at 50.1 per cent. 

With Semple noting Trudel’s intent to resign from Alimentation Couche-Tard being a mitigating factor to any perceived conflict of interest, he also believes the potential for a closer relationship between Fire & Flower and Couche-Tard may accelerate plans for growing the business using co-located sites on existing real estate from Circle K, a subsidiary of Alimentation Couche-Tard.

Semple’s financial projections remain intact, as he forecasts Fire & Flower to bring in $195.3 million in revenue in 2022 with a 30 per cent gross margin and adjusted EBITDA loss of $10.9 million. Looking ahead to 2023, Semple forecasts a jump to $247.6 million while maintaining a 30 per cent gross margin, with adjusted EBITDA returning to positive territory at a projected $1.3 million.

From a valuation perspective, Semple forecasts the company’s EV/Sales multiple to be 0.9x in 2022 before dropping to 0.7x in 2023, presenting a discount to the target of 1.2x.

Despite potential near-term uncertainty for investors with the CEO change, Semple remains optimistic in Fire & Flower as an investment. 

“We continue to view the shares as undervalued, though note implied upside is lean for the cannabis industry in the context of significant trailing 12 month share price declines for substantially all cannabis companies,” Semple said. 

FAF’s share price has fallen by 29.1 per cent since the start of 2022, dropping off after hitting a peak of $6.04/share on March 25 and falling as low as $2.52/share on May 11, though it has recovered 43.3 per cent of its value since that date.