Two top cannabis picks from Echelon Capital

The sector may still be down in the dumps, but investors should see better times ahead in the cannabis space with names like High Tide (High Tide Stock Quote, Charts, News, Analysts, Financials TSX:HITI) and Verano Holdings (Verano Holdings Stock Quote, Charts, News, Analysts, Financials CSE:VRNO). That’s according to Echelon Capital Markets analyst Andrew Semple, who in a pair of reports on Tuesday reiterated Top Pick statuses to HITI and VRNO for the first quarter of 2023.

Starting with High Tide, a Canadian retailer, distributor and e-commerce provider, Semple said the company is having success with its retail discount club model and reported 46 per cent year-over-year same-store sales growth in its fiscal third quarter 2022 (ended July 31) compared to a nationwide average decline at the time of 24 per cent.

Semple thinks High Tide still has room to expand its store count organically and through acquisitions in the Canadian market, while a recent deceleration of net new Canadian stores should ease competitive pressures and allow HITI to expand its gross margins in coming quarters.

“High Tide trades at 14.2x EV/2022E EBITDA and 8.9x EV/2023E EBITDA based on our estimates. We view this as an attractive valuation for a fast-growing company that appears to be emerging from peak competitive pressures, with room for expanding profitability from new verticals,” Semple wrote.

“High Tide has continually gained market share since launching its innovative discount club model in FQ421 and is one of few cannabis companies in Canada achieving positive EBITDA with a demonstrated history of growth and clear growth drivers ahead,” he said.

On Verano, a US-based producer and retailer with a footprint covering 14 states, Semple said the company is well-positioned for a solid 2023 with a portfolio of some of the top-performing assets across attractive, limited-license states. Semple said Verano has a healthy balance sheet and strong unlevered operating cashflow generation that he thinks is being underappreciated in the current market.

“We believe Verano’s heavy capex lift is largely complete, and much of the operating cashflow generated in 2023 will be available as FCF. We forecast $150 million of unlevered FCF in 2023, representing a 10.1 per cent FCF yield relative to enterprise value. This will become most evident in the second half of 2023, resulting in a 16.1 per cent FCF yield annualized for the second half of the year,” Semple wrote.

Semple maintained a “Buy” rating on Verano and 12-month target price of C$22.00, which at the time of publication represented a projected return of 412 per cent. On High Tide, Semple kept a “Buy” rating and target of $12.00, which represented a return of 480 per cent at the time of publication.