High Tide is extremely undervalued, says ATB

ATB Capital analyst Frederico Gomes is sending the love to Canadian cannabis retailer High Tide Inc (High Tide Stock Quote, Charts, News, Analysts, Financials TSXV:HITI) and singing its praises in a new research note to clients on Tuesday. Gomes said investors will want to take advantage of this down-but-not-out stock which has industry tailwinds to support expansion in the Canadian pot market.

“HITI is one of our highest conviction ideas due to its credible path to growth, management’s track record of execution, and a highly attractive valuation,” Gomes wrote. 

High Tide is Canada’s largest cannabis retailer by revenue with 140 stores across Ontario, Manitoba, Saskatchewan, Alberta and BC and including the Canna Cabana line of retail shops. The company also has online sales platforms as well as hemp-derived CBD and cannabis accessories businesses. 

By the proliferation of cannabis shops across the country, everyone now knows about the growing business in selling pot and accessories, and High Tide is one of the companies making a name for itself by acquiring stores and expanding into new territory.

Management intends on continuing the process, as witnessed by its latest announcement on Monday that it closed on a $19-million credit facility with connectFirst Credit Union, the aim of which is to help grow HITI’s store count. 

“Our growth has been amplified since we launched our innovative discount club model in October 2021, and we are now operating 140 Canna Cabana locations across Canada with 36 additional stores having been added to our portfolio year to date through organic growth and accretive acquisitions,” said High Tide President and CEO Raj Grover in a press release.

“Our goal is to continue gaining market share rapidly by increasing our store count to 150 by the end of this calendar year and to 200 by the end of 2023. This Credit Facility from connectFirst will help us do exactly that and give us the ability to pour even more fuel on the fire,” Grover said.

High Tide recently released its third quarter fiscal 2022 financials, which came in above analysts’ expectations. The Q3 revenue was $95.4 million, up 18 per cent from the previous quarter, compared to the consensus call of $89.3 million, while adjusted EBITDA was $4.2 million compared to the Street’s forecast at $2.9 million.

But all that momentum hasn’t been felt in the stock, which like the rest of the cannabis sector has fallen hard over the past year and a half. HITI rose from about $2.50 per share in late 2020 to as high as $15 by February, 2021. But that was the start of the pullback on pot, and High Tide spent the ensuing months gradually falling back, landing in sub-$2.00 territory where it has languished for the past couple of months.

That’s way too low, says Gomes, who sees HITI to be trading at a sharp discount by a number of measures. For instance, Gomes has the stock at an EV/Sales multiple on 2023 numbers at 0.4x and at an EV/EBITDA multiple of 8.6x. When compared to cannabis licensed producers (LPs) in Canada, those numbers represent discounts of 80 per cent and 53 per cent, respectively.

“While a portion of this valuation gap can be explained by different business models (retailers generally trade at lower multiples), we believe this large discount is unwarranted given HITI’s exposure to US CBD/accessories e- commerce retail, its leading position in Canadian cannabis retail and a better near-term growth and profitability outlook than LPs,” Gomes said.

Gomes said ATB is currently favouring retailers over LPs in the space because retail consolidation is happening at a faster pace, with all of those independent mom-and-pop pot shops likely leaving over time, making it easier to pick the few names in the space that are probably going to outlast the competition. High Tide is one of those winners, Gomes said, because it has the scale, the access to capital and the proven operational prowess to come out on top.

“We believe HITI will outperform the Canadian cannabis industry’s growth (we forecast an industry CAGR of 12 per cent through 2030), supported by market share gains over a backdrop of retail consolidation. We expect HITI to grow Canadian retail sales at a 22 per cent CAGR through 2030, driven by a mix of store expansion and increases in avg. sales per store,” he said.

Gomes said industry consolidation will be a tailwind for High Tide not just in terms of potential market share gains (he predicts HITI will eventually hit a national market share of about 15 per cent compared to six per cent today) but also in terms of improved margins as a more rational competitive environment emerges and the company takes advantage of scaling up. 

By the numbers, Gomes is predicting High Tide will generate full fiscal 2022 (year end October 31) revenue of $348.6 million compared to $181.2 million a year earlier and moving to $473.9 million for fiscal 2023. On adjusted EBITDA, Gomes is calling for HITI to go from $12.5 million in fiscal 2021 to $13.3 million in 2022 to $20.2 million in 2023.

With the update, Gomes reiterated an “Outperform” rating on High Tide and $10.00 target price, which at the time of publication represented a projected one-year return of 429 per cent.