High Tide is our top pick in cannabis, says Echelon

Cannabis retailer High Tide (High Tide Stock Quote, Charts, News, Analysts, Financials TSX:HITI) received another stamp of approval from Echelon Capital Markets on Thursday, with analyst Andrew Semple reiterating his position that HITI is Echelon’s highest conviction idea in the Canadian cannabis space.

Calgary-based High Tide, a retailer, distributor and e-commerce provider of adult-use cannabis products, hemp-derived CBD products and other accessories, reported its third quarter fiscal 2022 financials on Thursday for the period ended July 31, 2022. The Q3 featured revenue up 17.7 per cent sequentially and 98 per cent year-over-year to $95.4 million and adjusted EBITDA of $4.2 million compared to $2.4 million for the previous quarter and $1.5 million for the previous year’s third quarter.

President and CEO Raj Grover said in the company’s press release that the solid numbers came despite a highly competitive Canadian retail market and softening global e-commerce sales.

“High Tide now sits within striking distance of having the highest revenue of any cannabis company reporting in Canadian dollars,” Grover wrote. “Our same-store sales have continued their upward trajectory, increasing by 46 per cent year-over-year and 18 per cent sequentially.”

“This growth continues to be propelled by our innovative discount club model, which is specifically tailored to our Company’s unique position in the market through our diversified ecosystem.  I am also very happy to report that our Cabana Club loyalty program, which is the largest of its kind in Canada, now sits at over 750,000 members, which represents more than 12 per cent of the cannabis users across the country, excluding Quebec per Statistics Canada data,” he said.

Looking at the results, Semple said the $95.4 million topline was above his estimate at $89.4 million and the consensus call at $89.3 million, while the $4.2 million in EBITDA was also a beat of both his street-high forecast at $3.3 million and the consensus at $2.9 million. Gross margin of 27.0 per cent was down 100 basis points sequentially but roughly in-line with the analyst’s estimate at 27.6 per cent and the Street’s 27.3 per cent.

Semple called the Q3 results very strong and pointed to same-store sales which were up a surprise 18 per cent sequentially and up 46 per cent year-over-year.

“With few cannabis companies in Canada achieving positive EBITDA with a demonstrated history of growth and clear drivers ahead (from the discount club model), the Company remains a standout in the Canadian cannabis industry,” Semple wrote.

“High Tide remains our highest conviction investment idea in Canadian cannabis. We note the potential for additional upside to our model as High Tide continues to make accretive acquisitions, and with further updates to the discount club model progress,” he said.

High Tide shares rose sharply over the back end of 2020 and into 2021 but have pulled back over time since, going from a high of $15 in February of last year to just below $2 where the stock has been trading over the past couple of months.

Semple sees lots of good fortune ahead, though, and maintained a “Speculative Buy” rating in his new report along with a $12.00 target price, which at the time of publication represented a projected one-year return of 532 per cent.

Semple noted one headwind in the quarterly results, which came from HITI’s e-commerce business, which he estimated as having sales of about $14 million for the fiscal Q3 compared to about $17 million a quarter ago. He said e-commerce sales are likely to remain flat going forward but that High Tide’s diverse revenue streams more than compensate for the macro-influenced softness.

Looking ahead, Semple is calling for HITI to generate full fiscal 2022 (year end October 31) revenue of $349.2 million compared to $181.1 million in fiscal 2021 and heading to $465.4 million in fiscal 2023. The analyst is expecting the company’s adjusted EBITDA to go from $12.5 million in 2021 to $16.1 million in 2022 to $21.8 million in 2023. 

“We continue to be pleased by the strong momentum of the Company’s cannabis retail business in recent quarters. However, the ongoing normalization of high margin e-commerce sales impacts our 2023 margin and EBITDA estimates, which moderated our DCF valuation,” he said.

“We have reduced our discount rate to ten per cent (prev. 11 per cent) in our valuation model, after High Tide completed a $11.5 million equity financing and with the imminent close (according to mgmt.) of the non-dilutive $19 million connectFirst credit facility, reflecting our view that the Company’s outlook has been materially de-risked by the buttressing of the Company’s balance sheet,” Semple wrote.