High Tide Inc: Cantor's Updated Model For NuLeaf CBD Deal

The Analyst

In a recent analyst note, Pablo Zuanic, from Cantor Fitzgerald, remained Neutral on High Tide Inc. HITI and established a price target of C$7.75 for the stock.

The Thesis

Zuanic remains Neutral on High Tide shares and lowered the 12-month price target to C$7.75 from C$8.75 in part due to sectoral derating and increased proforma share count.

“We now factor in our estimates of the all-share deal for CO-based CBD operator, NuLeaf Naturals, which closed on November 29. The current sales run rate for NuLeaf is above US$19 Million and EBITDA margins of 27% are well above the HITI.TO margins of 3% for the July Quarter,” noted the analyst.

Zuanic explained that together with other deals closed in October (Blessed CBD in the UK and DankStop accessories), High Tide has completed over C$60 million worth of acquisitions since the end of July, resulting in about 6.4 million shares being issued on a base of 51 million.

Zuanic considered High Tide to be “a company going through a significant two-pronged transformation” such as:

1) shifting the brick-&-mortar retail store strategy in Canada to a club discounter model (a pilot program showed sales growth of 76% to 100% over six months);
2) diversifying as well as expanding into accessories and CBD.

Zuanic highlighted some of the challenges for the US CBD market and High Tide's shift to a club discount model represents execution risk (although management is confident the ramp-up in sales will offset the margin erosion in terms of $ earnings achieved).

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“That said, we give management credit for creatively adapting to challenging market conditions in cannabis retailing in Canada. On a proforma basis, we estimate the stock EV at C$481 Million, and we calculate the cannabis retail piece trades at 3.5x sales when stripping out CBD/accessories acquisitions at face value," Zuanic said.

He then noted that management-forward commentary calls for retail cannabis margins to decline as the company shifts to a club discount model. However, “the increased weight (due to recent M&A) of the higher-margin CBD and accessories businesses should help buffer the pressure.”

Valuation and price target

On a proforma basis, Zuanic estimates the HITI.TO proforma EV at C$481 million (not factoring in the recently announced C$40Mn at the market equity facility).

“If we strip out the non-cannabis retail units (GrassCity, Smoke Cartel; FAB Nutrition; Dankstop; Blessed CBD; NuLeaf Naturals) at acquisition value (~C$100Mn), we estimate the cannabis business has an EV of C$381 Million. We calculate the retail chain is valued at 3.5x current sales and we do not find the valuation attractive in the context of other retail stocks," Zuanic said.

“If the retail discount model is accretive to $ earnings and the acquired assets (CBD, accessories) improve the company’s growth profile (not just the margin profile), then the stock could work, and the premium could be justified. Our approach yields a price target of C$7.75 by Dec 2022."

Price Action

High Tide traded 2.39% higher at $5.57 per share at the time of writing late Friday afternoon.

Image By Ilona Szentivanyi