![Detailed DD post [re-post after pennystocks removed it]](https://a.thumbs.redditmedia.com/-u8f_3KNR4C4xszR_qNH3GzIEi4iY0UWG9PLnkrOHt8.jpg "Detailed DD post [re-post after pennystocks removed it]") | I posted this yesterday morning (UK time) but after 5 hours or so, pennystocks deleted the original post. A few people messaged me asking for it to be shared in a few High Tide specific pages. So here it is! -- This is my first time posting a DD post – a friend of mine who moderates on SPACs has shared some analysis I have written previously, but I’m keen to share this here, and see if there is any appetite for sharing my own personal written DD I have on the 30 stocks I have across a number of different portfolios. I have modified this format, as it was originally a script for a video which I created on the stock. If you prefer to listen – check it out here: https://youtu.be/qsjwU7kkPsw Some of the market stats (market cap, current multiples, etc.) are correct as of Feb-06, and clearly a little outdated since the price movements. Not a financial advisor, do your own DD. I am long HITI and have an expectation of a long term hold on this stock. Overview - High Tide Canada-based cannabis retail company, operating under multiple brands. It operates under 3 core divisions:
- Brick and mortar retail – 4 key brands with just under 70 locations in Canada. Brands include: Canna Cabana, New Leaf, Meta Cannabis and Kushbar. Forecast to have around 115 stores by end of 2021
- Online retail – has 2 brands, both of which attract millions of viewers per month – Grasscity.com and CBDcity.com
- Wholesale – manufacturer of paraphernalia in US and Canada. Number of products are branded with various celebrities, Snoop Dogg, Paramount Pictures, Trailer Park Boys and many more
- Has good c-level execs and experienced executive board; hold significant stake in the business. CEO Raj Grover holds just over 21% of the shares
- Currently has a market cap of around $280m. Still significant upside to the valuation – see analysis later in post
Investment Merits Very strong market growth: - Business has demonstrated growth both organically (through new store openings, more online sales and greater wholesale sales), as well as inorganically through M&A
- Growth in markets which High Tide has a physical presence in is expected to be very strong. North American cannabis market (Canada and US) is forecast to grow by 30% a year to 2027 (source: research and markets)
- Analysts covering High Tide are forecasting growth in excess of this, which is positive to see and implies capturing market share
- New markets / geographies ‘opening up’, legalizing and regulating cannabis is also an exciting and realistic prospect for incremental growth:
- The US federal legalization debate is on the table
- Many other countries are considering this too and High Tide is well positioned for these; this is catalyzed by the fact that government debt has increased significantly as part of the response to the COVID-19 health crisis. This needs to be repaid somehow, and increasing tax rates on existing taxes is an unpopular political move. Finding new tax revenues is a more palatable way of increasing tax revenues for governments. This is especially important in countries where elections are upcoming.
- Personally I do expect to see this accelerate the agenda for the regulation and legalization of cannabis in many new countries
- Whilst predominantly Canada and US based, High Tide does have presence in some markets where cannabis is not regulated or legalized, the UK for example (~10% of Grasscity sales are made here) and so it is well positioned with a strong and established brand to capitalize on this opportunity, when / if the market ‘opens up’
Regulation - High Tide benefits from the regulatory focus and overhang on the cannabis retail sector as it represents a strong barrier to entry, making it more challenging for new competitors to enter market
- Participants in the market need to have licenses and ensure consistent compliance with laws to continue operating – failure to comply can result in significant financial penalties
- Personally I normally don’t like investing into retail. There are usually fairly limited barriers to entry, minimal differentiation and negligible customer loyalty, however the cannabis market does have different characteristics in this respect and makes it a more compelling proposition
- Regulation also benefits those with scale, something High Tide has as the leading player in the market. It costs money to obtain and retain licences to operate and it costs money to ensure compliance with all the laws and regulations and that all staff are acting in accordance with these
- Some parallels in this respect which can be drawn to casino gaming in casinos; you don’t see new casinos popping up at the same rate which you see new restaurants or apparel stores opening
Demand - There’s a lot to like about the demand dynamics for High Tide. It’s vice-nature means that demand is less correlated to disposable incomes. Given where we are in economic cycle, especially important consideration
- For those doubting this, check alcohol, tobacco or gambling expenditure across economic cycles historically, for a proxy
Strong performance throughout COVID-19 crisis - Despite heavy weighting towards brick and mortar, (the most hard hit part of retail) it has effectively managed the shift to online, which is a positive
- Has relied on government support and financial assistance in the form of job retention schemes (address in more detail later in post)
- This demonstrates management are capable and have effectively navigated the challenging situation
Data - Massively summarized from the video, (and my video on KERN) so check that out if interested in this point, however, they have unique access to supply chain data which could be monetized effectively and generate strong levels of recurring revenues
- Other established sectors have a trusted party with such unique access to data (e.g. alcohol, lithium, different foods, etc.) and the opportunity here is enormous
- I would like to see High Tide capitalize on this
Forecasts financials & analysts - Currently 2 analysts covering High Tide, both have a buy rating on the business
- Their coverage is slightly outdated (expect this being updated soon and a further catalyst for positive price action) and their price targets are 60c; at the time their reports were published, they were forecasting a 4x upside (HITI was trading at ~15c)
- Same analysts also forecasting strong growth - 77% CAGR to 2022. They are forecasting revenues of around $250m and EBITDA of $46m. A reminder here, these are professional analysts, not YouTube students – these come from their financial models, the assumptions of which are discussed with management
https://preview.redd.it/nfq8h5fpvmg61.png?width=602&format=png&auto=webp&s=f48977ca9c0072003ac71206cef28b0a493dd583 Valuation - Going to go quick here, its explained more slowly in the video but High Tide is currently valued at a significant discount to the other listed peers
- Looking at EV / FY+1 Sales multiples – EBITDA not meaningful as some of the peer group are EBITDA negative and High Tide itself has only recently become EBITDA positive
https://preview.redd.it/4t4n303rvmg61.png?width=342&format=png&auto=webp&s=636bca248743272bed283af97780d3e1e121312f - Personally, I think Planet13 is the most comparable given its business model
- Taking both Planet13 multiple and peer group average multiple, this is then applied to High Tide’s forecast FY+1 sales to calculate an enterprise value – this is adjusted for net debt to get to a market capitalization and then divided by the share count to get an implied share price
- The table below shows the implied stock price valuations from this analysis
https://preview.redd.it/1mks0oxrvmg61.png?width=406&format=png&auto=webp&s=587ca8e2468b825103905931ebe7ab5b42314c6f NB – assumed the following: - Net debt will change in coming year given the capital structure and a large number of convertible notes – this has been ignored given it will have small impact on the price
- The share count will change as a result of dilution from various instruments – if this bothers you massively then look at the valuation discount on the basis of the enterprise value as it does not impact this (and only slightly on the market cap given minimal impacts to cash from instrument execution, etc.)
- Not accounting for any stock split, consolidation or any other M&A deals
- The FY21 financials are on the basis of the mean broker estimates from Thomson Reuters – Seeking Alpha has different and slightly outdated ones
Investment Risks & Mitigants / Outstanding DD points Exposure to changing regulation - US is only a small part of the market which High Tide addresses, while a change in regulation would have a big impact on the company, currently it is unlikely this would happen, given the discussions about potential federal legalization
- Canada regulation is established and not going anywhere
- Other countries likely to legalize and regulate cannabis, as outlined earlier
Dilution - No escaping that there will be some significant dilution for shareholders, as pointed out in the table below, but this should be already priced into the stock
- Potential that new equity issuances could occur to help finance growth, but provided this growth is delivered, it should be accretive for the stock price
https://preview.redd.it/vkrb2ousvmg61.png?width=602&format=png&auto=webp&s=40f8f4c65b92efc15af0eba42bb873c774700eff Potentially misleading cost basis information - A risk that investors need to be aware with for all companies which have relied on government financial support during COVID-19 measures. Such support has resulted in the number of businesses going bankrupt decreasing massively – this is at a lower level than it ever normally is and is masking some real underlying issues within companies. As investors we need to be open eyed about this
- As High Tide has benefited from support in the form of the Canada’s Emergency Wage Support scheme, there is the risk that once this is lifted it may become apparent that the cost base has not been effectively managed
- Personally, I think this is mitigated by the synergy analysis conducted as part of the M&A. A full cost base analysis would have been conducted to calculate the potential $8.4m synergies so strong likelihood that this is under control, but should keep on our radar and reassess
Marketing expenses and celebrity licenses - Need more information to ascertain whether these are underpinned by a compelling ROI. Seen a lot of people suggest this is a great positive, but the impact on sales volumes from these is unknown, as is the terms of these license agreements (e.g. split between upfront fee vs. volume-based fee)
- No escaping the fact that it is an increased cost and so need to understand the ROI this generates to determine whether it really is compelling
- Is there really more demand to pay a premium for Snoop Dogg bongs, Guns n Roses papers, Cheech & Chong grinders, or whatever they may be?
- So far management have suggested this has been helpful in driving new sales, but this is something to dig into more
If you want to check out the video, it would be appreciated: https://youtu.be/qsjwU7kkPsw |
 | Reposting this DD after it was removed by mods first time around. Potential offending points have been removed. --- Some of the market stats are a little outdated (market cap, current multiples, etc.) but are correct as of Feb-06. This was originally written for another purpose. Not a financial advisor, do your own DD. I am long HITI and have an expectation of a long term hold on this stock. Overview - High Tide Canada-based cannabis retail company, operating under multiple brands. It operates under 3 core divisions:
- Brick and mortar retail – 4 key brands with just under 70 locations in Canada. Brands include: Canna Cabana, New Leaf, Meta Cannabis and Kushbar. Forecast to have around 115 stores by end of 2021
- Online retail – has 2 brands, both of which attract millions of viewers per month – Grasscity.com and CBDcity.com
- Wholesale – manufacturer of paraphernalia in US and Canada. Number of products are branded with various celebrities, Snoop Dogg, Paramount Pictures, Trailer Park Boys and many more
- Has good c-level execs and experienced executive board; hold significant stake in the business. CEO Raj Grover holds just over 21% of the shares
- Currently has a market cap of around $280m. Still significant upside to the valuation – see analysis later in post
Investment Merits Very strong market growth: - Business has demonstrated growth both organically (through new store openings, more online sales and greater wholesale sales), as well as inorganically through M&A
- Growth in markets which High Tide has a physical presence in is expected to be very strong. North American cannabis market (Canada and US) is forecast to grow by 30% a year to 2027 (source: research and markets)
- Analysts covering High Tide are forecasting growth in excess of this, which is positive to see and implies capturing market share
- New markets / geographies ‘opening up’, legalizing and regulating cannabis is also an exciting and realistic prospect for incremental growth:
- The US federal legalization debate is on the table
- Many other countries are considering this too and High Tide is well positioned for these; this is catalyzed by the fact that government debt has increased significantly as part of the response to the COVID-19 health crisis. This needs to be repaid somehow, and increasing tax rates on existing taxes is an unpopular political move. Finding new tax revenues is a more palatable way of increasing tax revenues for governments. This is especially important in countries where elections are upcoming.
- Personally I do expect to see this accelerate the agenda for the regulation and legalization of cannabis in many new countries
- Whilst predominantly Canada and US based, High Tide does have presence in some markets where cannabis is not regulated or legalized, the UK for example (~10% of Grasscity sales are made here) and so it is well positioned with a strong and established brand to capitalize on this opportunity, when / if the market ‘opens up’
Regulation - High Tide benefits from the regulatory focus and overhang on the cannabis retail sector as it represents a strong barrier to entry, making it more challenging for new competitors to enter market
- Participants in the market need to have licenses and ensure consistent compliance with laws to continue operating – failure to comply can result in significant financial penalties
- Personally I normally don’t like investing into retail. There are usually fairly limited barriers to entry, minimal differentiation and negligible customer loyalty, however the cannabis market does have different characteristics in this respect and makes it a more compelling proposition
- Regulation also benefits those with scale, something High Tide has as the leading player in the market. It costs money to obtain and retain licences to operate and it costs money to ensure compliance with all the laws and regulations and that all staff are acting in accordance with these
- Some parallels in this respect which can be drawn to casino gaming in casinos; you don’t see new casinos popping up at the same rate which you see new restaurants or apparel stores opening
Demand - There’s a lot to like about the demand dynamics for High Tide. It’s vice-nature means that demand is less correlated to disposable incomes. Given where we are in economic cycle, especially important consideration
- For those doubting this, check alcohol, tobacco or gambling expenditure across economic cycles historically, for a proxy
Strong performance throughout COVID-19 crisis - Despite heavy weighting towards brick and mortar, (the most hard hit part of retail) it has effectively managed the shift to online, which is a positive
- Has relied on government support and financial assistance in the form of job retention schemes (address in more detail later in post)
- This demonstrates management are capable and have effectively navigated the challenging situation
Data - Massively summarized from the other purpose, however, they have unique access to supply chain data which could be monetized effectively and generate strong levels of recurring revenues
- Other established sectors have a trusted party with such unique access to data (e.g. alcohol, lithium, different foods, etc.) and the opportunity here is enormous
- I would like to see High Tide capitalize on this
Forecasts financials & analysts - Currently 2 analysts covering High Tide, both have a buy rating on the business
- Their coverage is slightly outdated (expect this being updated soon and a further catalyst for positive price action) and their price targets are 60c; at the time their reports were published, they were forecasting a 4x upside (HITI was trading at ~15c)
- Same analysts also forecasting strong growth - 77% CAGR to 2022. They are forecasting revenues of around $250m and EBITDA of $46m. A reminder here, these are professional analysts, not YouTube students – these come from their financial models, the assumptions of which are discussed with management
https://preview.redd.it/csw4p0vpoxg61.png?width=602&format=png&auto=webp&s=143ac8f94e6fcd4df3d50d41f513da45367f28f1 Valuation - Going to go quick here, however, High Tide is currently valued at a significant discount to the other listed peers
- Looking at EV / FY+1 Sales multiples – EBITDA not meaningful as some of the peer group are EBITDA negative and High Tide itself has only recently become EBITDA positive
https://preview.redd.it/zo0vr7vqoxg61.png?width=262&format=png&auto=webp&s=686be7e82e3fbfb3d7021823ed84f2cf795b49d2 - Personally, I think Planet13 is the most comparable given its business model
- Taking both Planet13 multiple and peer group average multiple, this is then applied to High Tide’s forecast FY+1 sales to calculate an enterprise value – this is adjusted for net debt to get to a market capitalization and then divided by the share count to get an implied share price
- The table below shows the implied stock price valuations from this analysis
https://preview.redd.it/qp6qea1soxg61.png?width=277&format=png&auto=webp&s=3333aa9ea7213961a44bc37e4292bad316872b48 NB – assumed the following: - Net debt will change in coming year given the capital structure and a large number of convertible notes – this has been ignored given it will have small impact on the price
- The share count will change as a result of dilution from various instruments – if this bothers you massively then look at the valuation discount on the basis of the enterprise value as it does not impact this (and only slightly on the market cap given minimal impacts to cash from instrument execution, etc.)
- Not accounting for any stock split, consolidation or any other M&A deals
- The FY21 financials are on the basis of the mean broker estimates from Thomson Reuters – Seeking Alpha has different and slightly outdated ones
Investment Risks & Mitigants / Outstanding DD points Exposure to changing regulation - US is only a small part of the market which High Tide addresses, while a change in regulation would have a big impact on the company, currently it is unlikely this would happen, given the discussions about potential federal legalization
- Canada regulation is established and not going anywhere
- Other countries likely to legalize and regulate cannabis, as outlined earlier
Dilution - No escaping that there will be some significant dilution for shareholders, as pointed out in the table below, but this should be already priced into the stock
- Potential that new equity issuances could occur to help finance growth, but provided this growth is delivered, it should be accretive for the stock price
https://preview.redd.it/aaslgozsoxg61.png?width=463&format=png&auto=webp&s=767bffe9d6906bf21340aecd884cfad5ec7219c4 Potentially misleading cost basis information - A risk that investors need to be aware with for all companies which have relied on government financial support during COVID-19 measures. Such support has resulted in the number of businesses going bankrupt decreasing massively – this is at a lower level than it ever normally is and is masking some real underlying issues within companies. As investors we need to be open eyed about this
- As High Tide has benefited from support in the form of the Canada’s Emergency Wage Support scheme, there is the risk that once this is lifted it may become apparent that the cost base has not been effectively managed
- Personally, I think this is mitigated by the synergy analysis conducted as part of the M&A. A full cost base analysis would have been conducted to calculate the potential $8.4m synergies so strong likelihood that this is under control, but should keep on our radar and reassess
Marketing expenses and celebrity licenses - Need more information to ascertain whether these are underpinned by a compelling ROI. Seen a lot of people suggest this is a great positive, but the impact on sales volumes from these is unknown, as is the terms of these license agreements (e.g. split between upfront fee vs. volume-based fee)
- No escaping the fact that it is an increased cost and so need to understand the ROI this generates to determine whether it really is compelling
- Is there really more demand to pay a premium for Snoop Dogg bongs, Guns n Roses papers, Cheech & Chong grinders, or whatever they may be?
- So far management have suggested this has been helpful in driving new sales, but this is something to dig into more
TLDR
Despite the recent rally in stock price, the business remains undervalued on a relative basis versus its peers (analysis in body of post). There is a compelling investment case for High Tide where in my opinion the merits of the investment outweigh the risks. Clearly given the small cap nature of the stock, this is inherently more volatile than larger blue chip stocks and carries with it a degree of risk. |
As I am sure a lot of you know,
Mountain Crest Acquisitions (MCAC) are in late-stage talks with playboy to take them public currently at a valuation of
~$425M meaning we should see the MCAC ticket convert to Playboys ticker, PLBY, within a matter of days, if not weeks. A lot of the people I have seen talking about the Playboy acquisition have argued that Playboy is a dying brand and are far beyond their prime, which is no doubt true, in terms of selling sexy magazines that have all but been made redundant by online pornography. However, this company and its newish CEO (of 2017), Ben Kohn, have given it a new lease of life and
are changing the globally recognized brand's direction to be more of a lifestyle and sexual wellness brand. They have been seeing huge year on year growth since Kohn's appointment in 2017 across almost all revenue streams, Kohn has been a part of Playboy for many years and initially helped privatize them in the early 2010s. He is highly regarded for his marketing and sales abilities.
WHY PLAYBOY? First of all let me offer you CEO Ben Kohn the chance to convince you:
Here is his investor presentation. The numbers are extremely impressive. If you would rather hear it from me, for whatever reason, my take is below:
For me, one of the most notable things about this deal is its the extremely rare opportunity to buy into
one of the world's most known brands at such a low valuation. How many SPACs currently on the market would you be able to ask your typical man or woman on the street about the company they plan on buying and almost everytime get an answer about who they are and what they do?
Playboy had a WHOPPING $3bn annual spend on thier brand across 180 countries worldwide last year! Playboy are taking huge strides moving away from the sex negative and very 20th century ideals they built their original empire off, and closing in on an increasingly empowered and sexually liberated young demographic.
The sexual wellness market is seeing massive growth among people both young and old and is expected to reach $125 billion by 2026 with an expected anual growth of 12.1% YoY, now think about the size of this market in context of how many brands do you know that are key players in this sector? It should be somewhat obvious that
Playboy is in an extremely unique position to capitalize on its massive recognition in a growing market otherwise lacking recognized leaders, they plan on doing this with a strategy of M&A which are outlined below.
First, I will talk about what they are doing now to fit themselves into the market we see today.
Playboy has begun a plan to increase growth via acquisitions, and started by buying leading sexual wellness reatiler Yandy at the end of 2019, and have
driven direct sales up from $3.7M in 1H 2019 to $29.7M in 1H 2020. On top of this, they are working to make their own
playboy.com website into a retail destination, and across Yandy and their own store they were seeing 70,000 orders a month with a AOV of $72.
During the stock redemption period Stockholders requested redemption of a total of 8,842 shares, less than 0.2% of Mountain Crest’s issued shares. As a result, Mountain Crest anticipates that approximately $58.7 million will be released to PLBY Group immediately following the closing of the transactions, with further PIPE investments of $50 million.
Ben Kohn, CEO of Playboy, said, “We are delighted with the overwhelming support for this transaction, which at closing is expected to inject more than $100 million of gross proceeds into PLBY Group, so that we can aggressively capitalize on our well-defined and exciting organic and acquisition-led growth plan.”. On top of direct sales increases,
Playboy continued to capitalize on their brand recognition by increasing licensing revenues YoY, with ~$400M currently in forward-booked cash flow. Note licensing is one of the most cost-effective way brands can earn revenue,
with 80% cost margins and being able to create such licensing demand is a rare feature only attributed to truly globally recognized brands. I read somewhere which I now cannot find that Kohn has said (I am sure somewhat jokingly) that he believes the Playboy
Bunny Logo alone is worth a billion dollars, and I can see some truth in it, the Playboy bunny is close to the levels of recognition of the Nike swoosh or the McDonalds M, even among young people who have probably never seen a playboy mag before, myself included (i have never seen it sold in the UK).
As breifly mentioned above, playboy Revenues are growing rapidly.
2020 Projected Revenues is expected to be up 75% year over year, and Projected Adjusted EBITDA is expected to be up 112% year over year, they have projected 2021E revenue and adjusted EBITDA of $166.8M and $40.3M, respectively, with an goal of $100M EBITDA by 2026.
They already have a number of
CBD-based products and have plans in place to grow into the legal marijuana industry when it is eventually legalized at the federal level.
They are looking to
increase their positions in the gaming industry and have recently opened a poker house in Houston, on top of their London Casino, with further plans to add more casinos in the US, and
looking for sports betting partnership opportunities. Playboy are already an established producer of apparel and maintain a realtively large presence within the market, particularly
in China, where their items are sold in over 2,500 brick and mortar stores, and 1,000 online stores across the nation. In the western World
they are stocked at household retailers such as urban outfitters, and have done many collabs with well regarded and in fashion millenial brands such as
Supreme, Anti Social Social Club, and Alpha industries (all 3 of which have seen extraordinary growth among young people all within very short time).
For me this stands out massively and shows promise on both sides of the table; These trendy and modern brands want to associate with the Playboy logo and lifestyle, showing a level of interest from consumers, but more importantly it shows that Playboy is tapped in and aware of the youth culture, an area in which they have the potential to capitalise massively on through all of their revenue streams. One of the things i think people are most underestimating about this merger is that
the current trajectory Kohn is taking Playboy along is very 2021, and is extremely focused on growth. I believe the brand to be undervalued already, and when taking into consideration the trends in Millenial and Gen Z society, I think this brand is ready to once again become a market leader in its new sectors.
A comment I saw on another DD put it well:
"If Kylie Jenner thinks its cool, it probably is". It sounds stupid, but the power of social media in conjunction with its recognized logo and brand mean you cannot underestimate this companies value and
potential for both short term and long term growth. Coupled with the large cash injection of over $100M and a new focus on M&A, the upside really is potentially enormous. Personally i think it is somewhat criminal this company does not have a current valuation of close to a billion USD considering its recognition, and i think Kohn is the man to enable playboy to capitalise on their extremely unique position in a rapidly growing market.
The above stats are all taken from the Playboy investor presentation given by Ben Kohn
here, (as said above I would encourage you all to look at this, it is very impressive), and from MCAC press releases that can be found
here. ![Detailed DD post [re-post after pennystocks deleted it]](https://b.thumbs.redditmedia.com/_a5fFxhQplfVCy70iqdhYPRHj7Ccgy-m4AUAf9dFMCI.jpg "Detailed DD post [re-post after pennystocks deleted it]") | I posted this yesterday morning (UK time) but after 5 hours or so, pennystocks deleted the original post. A few people messaged me asking for it to be shared in a few High Tide specific pages. So here it is! Hope this is OK for the mods here? -- This is my first time posting a DD post – a friend of mine who moderates on SPACs has shared some analysis I have written previously, but I’m keen to share this here, and see if there is any appetite for sharing my own personal written DD I have on the 30 stocks I have across a number of different portfolios. I have modified this format, as it was originally a script for a video which I created on the stock. If you prefer to listen – check it out here: https://youtu.be/qsjwU7kkPsw Some of the market stats (market cap, current multiples, etc.) are correct as of Feb-06, and clearly a little outdated since the price movements. Not a financial advisor, do your own DD. I am long HITI and have an expectation of a long term hold on this stock. Overview - High Tide Canada-based cannabis retail company, operating under multiple brands. It operates under 3 core divisions:
- Brick and mortar retail – 4 key brands with just under 70 locations in Canada. Brands include: Canna Cabana, New Leaf, Meta Cannabis and Kushbar. Forecast to have around 115 stores by end of 2021
- Online retail – has 2 brands, both of which attract millions of viewers per month – Grasscity.com and CBDcity.com
- Wholesale – manufacturer of paraphernalia in US and Canada. Number of products are branded with various celebrities, Snoop Dogg, Paramount Pictures, Trailer Park Boys and many more
- Has good c-level execs and experienced executive board; hold significant stake in the business. CEO Raj Grover holds just over 21% of the shares
- Currently has a market cap of around $280m. Still significant upside to the valuation – see analysis later in post
Investment Merits Very strong market growth: - Business has demonstrated growth both organically (through new store openings, more online sales and greater wholesale sales), as well as inorganically through M&A
- Growth in markets which High Tide has a physical presence in is expected to be very strong. North American cannabis market (Canada and US) is forecast to grow by 30% a year to 2027 (source: research and markets)
- Analysts covering High Tide are forecasting growth in excess of this, which is positive to see and implies capturing market share
- New markets / geographies ‘opening up’, legalizing and regulating cannabis is also an exciting and realistic prospect for incremental growth:
- The US federal legalization debate is on the table
- Many other countries are considering this too and High Tide is well positioned for these; this is catalyzed by the fact that government debt has increased significantly as part of the response to the COVID-19 health crisis. This needs to be repaid somehow, and increasing tax rates on existing taxes is an unpopular political move. Finding new tax revenues is a more palatable way of increasing tax revenues for governments. This is especially important in countries where elections are upcoming.
- Personally I do expect to see this accelerate the agenda for the regulation and legalization of cannabis in many new countries
- Whilst predominantly Canada and US based, High Tide does have presence in some markets where cannabis is not regulated or legalized, the UK for example (~10% of Grasscity sales are made here) and so it is well positioned with a strong and established brand to capitalize on this opportunity, when / if the market ‘opens up’
Regulation - High Tide benefits from the regulatory focus and overhang on the cannabis retail sector as it represents a strong barrier to entry, making it more challenging for new competitors to enter market
- Participants in the market need to have licenses and ensure consistent compliance with laws to continue operating – failure to comply can result in significant financial penalties
- Personally I normally don’t like investing into retail. There are usually fairly limited barriers to entry, minimal differentiation and negligible customer loyalty, however the cannabis market does have different characteristics in this respect and makes it a more compelling proposition
- Regulation also benefits those with scale, something High Tide has as the leading player in the market. It costs money to obtain and retain licences to operate and it costs money to ensure compliance with all the laws and regulations and that all staff are acting in accordance with these
- Some parallels in this respect which can be drawn to casino gaming in casinos; you don’t see new casinos popping up at the same rate which you see new restaurants or apparel stores opening
Demand - There’s a lot to like about the demand dynamics for High Tide. It’s vice-nature means that demand is less correlated to disposable incomes. Given where we are in economic cycle, especially important consideration
- For those doubting this, check alcohol, tobacco or gambling expenditure across economic cycles historically, for a proxy
Strong performance throughout COVID-19 crisis - Despite heavy weighting towards brick and mortar, (the most hard hit part of retail) it has effectively managed the shift to online, which is a positive
- Has relied on government support and financial assistance in the form of job retention schemes (address in more detail later in post)
- This demonstrates management are capable and have effectively navigated the challenging situation
Data - Massively summarized from the video, (and my video on KERN) so check that out if interested in this point, however, they have unique access to supply chain data which could be monetized effectively and generate strong levels of recurring revenues
- Other established sectors have a trusted party with such unique access to data (e.g. alcohol, lithium, different foods, etc.) and the opportunity here is enormous
- I would like to see High Tide capitalize on this
Forecasts financials & analysts - Currently 2 analysts covering High Tide, both have a buy rating on the business
- Their coverage is slightly outdated (expect this being updated soon and a further catalyst for positive price action) and their price targets are 60c; at the time their reports were published, they were forecasting a 4x upside (HITI was trading at ~15c)
- Same analysts also forecasting strong growth - 77% CAGR to 2022. They are forecasting revenues of around $250m and EBITDA of $46m. A reminder here, these are professional analysts, not YouTube students – these come from their financial models, the assumptions of which are discussed with management
https://preview.redd.it/5pwznbe5xmg61.png?width=602&format=png&auto=webp&s=bb1be853d9db5eaa7dc3c7b26630a173bbd064cf Valuation - Going to go quick here, its explained more slowly in the video but High Tide is currently valued at a significant discount to the other listed peers
- Looking at EV / FY+1 Sales multiples – EBITDA not meaningful as some of the peer group are EBITDA negative and High Tide itself has only recently become EBITDA positive
https://preview.redd.it/l52oajp6xmg61.png?width=342&format=png&auto=webp&s=e31e1944101c6488a24f470bc3b91744f4c2dccf - Personally, I think Planet13 is the most comparable given its business model
- Taking both Planet13 multiple and peer group average multiple, this is then applied to High Tide’s forecast FY+1 sales to calculate an enterprise value – this is adjusted for net debt to get to a market capitalization and then divided by the share count to get an implied share price
- The table below shows the implied stock price valuations from this analysis
https://preview.redd.it/2j51fwigxmg61.png?width=406&format=png&auto=webp&s=f678c5c66ced846ac45fa698c7e454f71a4232b6 NB – assumed the following: - Net debt will change in coming year given the capital structure and a large number of convertible notes – this has been ignored given it will have small impact on the price
- The share count will change as a result of dilution from various instruments – if this bothers you massively then look at the valuation discount on the basis of the enterprise value as it does not impact this (and only slightly on the market cap given minimal impacts to cash from instrument execution, etc.)
- Not accounting for any stock split, consolidation or any other M&A deals
- The FY21 financials are on the basis of the mean broker estimates from Thomson Reuters – Seeking Alpha has different and slightly outdated ones
Investment Risks & Mitigants / Outstanding DD points Exposure to changing regulation - US is only a small part of the market which High Tide addresses, while a change in regulation would have a big impact on the company, currently it is unlikely this would happen, given the discussions about potential federal legalization
- Canada regulation is established and not going anywhere
- Other countries likely to legalize and regulate cannabis, as outlined earlier
Dilution - No escaping that there will be some significant dilution for shareholders, as pointed out in the table below, but this should be already priced into the stock
- Potential that new equity issuances could occur to help finance growth, but provided this growth is delivered, it should be accretive for the stock price
https://preview.redd.it/t0im6idhxmg61.png?width=602&format=png&auto=webp&s=4bff366e68eeeadd5ac49ab5d97885685a327a6b Potentially misleading cost basis information - A risk that investors need to be aware with for all companies which have relied on government financial support during COVID-19 measures. Such support has resulted in the number of businesses going bankrupt decreasing massively – this is at a lower level than it ever normally is and is masking some real underlying issues within companies. As investors we need to be open eyed about this
- As High Tide has benefited from support in the form of the Canada’s Emergency Wage Support scheme, there is the risk that once this is lifted it may become apparent that the cost base has not been effectively managed
- Personally, I think this is mitigated by the synergy analysis conducted as part of the M&A. A full cost base analysis would have been conducted to calculate the potential $8.4m synergies so strong likelihood that this is under control, but should keep on our radar and reassess
Marketing expenses and celebrity licenses - Need more information to ascertain whether these are underpinned by a compelling ROI. Seen a lot of people suggest this is a great positive, but the impact on sales volumes from these is unknown, as is the terms of these license agreements (e.g. split between upfront fee vs. volume-based fee)
- No escaping the fact that it is an increased cost and so need to understand the ROI this generates to determine whether it really is compelling
- Is there really more demand to pay a premium for Snoop Dogg bongs, Guns n Roses papers, Cheech & Chong grinders, or whatever they may be?
- So far management have suggested this has been helpful in driving new sales, but this is something to dig into more
If you want to check out the video, it would be appreciated: https://youtu.be/qsjwU7kkPsw |
I posted this yesterday morning (UK time) but after 5 hours or so,
pennystocks deleted the original post. I had a message to share it on here too, so here it is!
--
This is my first time posting a DD post – a friend of mine who moderates on
SPACs has shared some analysis I have written previously, but I’m keen to share this here, and see if there is any appetite for sharing my own personal written DD I have on the 30 stocks I have across a number of different portfolios.
I have modified this format, as it was originally a script for a video which I created on the stock. If you prefer to listen – check it out here:
https://youtu.be/qsjwU7kkPsw Some of the market stats (market cap, current multiples, etc.) are correct as of Feb-06, and clearly a little outdated since the price movements.
Not a financial advisor, do your own DD. I am long HITI and have an expectation of a long term hold on this stock.
Overview - High Tide Canada-based cannabis retail company, operating under multiple brands. It operates under 3 core divisions:
- Brick and mortar retail – 4 key brands with just under 70 locations in Canada. Brands include: Canna Cabana, New Leaf, Meta Cannabis and Kushbar. Forecast to have around 115 stores by end of 2021
- Online retail – has 2 brands, both of which attract millions of viewers per month – Grasscity.com and CBDcity.com
- Wholesale – manufacturer of paraphernalia in US and Canada. Number of products are branded with various celebrities, Snoop Dogg, Paramount Pictures, Trailer Park Boys and many more
- Has good c-level execs and experienced executive board; hold significant stake in the business. CEO Raj Grover holds just over 21% of the shares
- Currently has a market cap of around $280m. Still significant upside to the valuation – see analysis later in post
Investment Merits Very strong market growth:
- Business has demonstrated growth both organically (through new store openings, more online sales and greater wholesale sales), as well as inorganically through M&A
- Growth in markets which High Tide has a physical presence in is expected to be very strong. North American cannabis market (Canada and US) is forecast to grow by 30% a year to 2027 (source: research and markets)
- Analysts covering High Tide are forecasting growth in excess of this, which is positive to see and implies capturing market share
- New markets / geographies ‘opening up’, legalizing and regulating cannabis is also an exciting and realistic prospect for incremental growth:
- The US federal legalization debate is on the table
- Many other countries are considering this too and High Tide is well positioned for these; this is catalyzed by the fact that government debt has increased significantly as part of the response to the COVID-19 health crisis. This needs to be repaid somehow, and increasing tax rates on existing taxes is an unpopular political move. Finding new tax revenues is a more palatable way of increasing tax revenues for governments. This is especially important in countries where elections are upcoming.
- Personally I do expect to see this accelerate the agenda for the regulation and legalization of cannabis in many new countries
- Whilst predominantly Canada and US based, High Tide does have presence in some markets where cannabis is not regulated or legalized, the UK for example (~10% of Grasscity sales are made here) and so it is well positioned with a strong and established brand to capitalize on this opportunity, when / if the market ‘opens up’
Regulation - High Tide benefits from the regulatory focus and overhang on the cannabis retail sector as it represents a strong barrier to entry, making it more challenging for new competitors to enter market
- Participants in the market need to have licenses and ensure consistent compliance with laws to continue operating – failure to comply can result in significant financial penalties
- Personally I normally don’t like investing into retail. There are usually fairly limited barriers to entry, minimal differentiation and negligible customer loyalty, however the cannabis market does have different characteristics in this respect and makes it a more compelling proposition
- Regulation also benefits those with scale, something High Tide has as the leading player in the market. It costs money to obtain and retain licences to operate and it costs money to ensure compliance with all the laws and regulations and that all staff are acting in accordance with these
- Some parallels in this respect which can be drawn to casino gaming in casinos; you don’t see new casinos popping up at the same rate which you see new restaurants or apparel stores opening
Demand - There’s a lot to like about the demand dynamics for High Tide. It’s vice-nature means that demand is less correlated to disposable incomes. Given where we are in economic cycle, especially important consideration
- For those doubting this, check alcohol, tobacco or gambling expenditure across economic cycles historically, for a proxy
Strong performance throughout COVID-19 crisis - Despite heavy weighting towards brick and mortar, (the most hard hit part of retail) it has effectively managed the shift to online, which is a positive
- Has relied on government support and financial assistance in the form of job retention schemes (address in more detail later in post)
- This demonstrates management are capable and have effectively navigated the challenging situation
Data - Massively summarized from the video, (and my video on KERN) so check that out if interested in this point, however, they have unique access to supply chain data which could be monetized effectively and generate strong levels of recurring revenues
- Other established sectors have a trusted party with such unique access to data (e.g. alcohol, lithium, different foods, etc.) and the opportunity here is enormous
- I would like to see High Tide capitalize on this
Forecasts financials & analysts - Currently 2 analysts covering High Tide, both have a buy rating on the business
- Their coverage is slightly outdated (expect this being updated soon and a further catalyst for positive price action) and their price targets are 60c; at the time their reports were published, they were forecasting a 4x upside (HITI was trading at ~15c)
- Same analysts also forecasting strong growth - 77% CAGR to 2022. They are forecasting revenues of around $250m and EBITDA of $46m. A reminder here, these are professional analysts, not YouTube students – these come from their financial models, the assumptions of which are discussed with management
https://preview.redd.it/9ft3iuw6zmg61.png?width=602&format=png&auto=webp&s=44f5a24a035466bac6e9e72c70eb1edcadf5091d Valuation - Going to go quick here, its explained more slowly in the video but High Tide is currently valued at a significant discount to the other listed peers
- Looking at EV / FY+1 Sales multiples – EBITDA not meaningful as some of the peer group are EBITDA negative and High Tide itself has only recently become EBITDA positive
https://preview.redd.it/83j8aqdkzmg61.png?width=342&format=png&auto=webp&s=f06ec34f6de10eeae049710dd59c494f6ef697c9 - Personally, I think Planet13 is the most comparable given its business model
- Taking both Planet13 multiple and peer group average multiple, this is then applied to High Tide’s forecast FY+1 sales to calculate an enterprise value – this is adjusted for net debt to get to a market capitalization and then divided by the share count to get an implied share price
- The table below shows the implied stock price valuations from this analysis
https://preview.redd.it/1z2ap11mzmg61.png?width=406&format=png&auto=webp&s=775ddc0c9d7e99412dbb4eb1fbbf8ed4645bc235 NB – assumed the following: - Net debt will change in coming year given the capital structure and a large number of convertible notes – this has been ignored given it will have small impact on the price
- The share count will change as a result of dilution from various instruments – if this bothers you massively then look at the valuation discount on the basis of the enterprise value as it does not impact this (and only slightly on the market cap given minimal impacts to cash from instrument execution, etc.)
- Not accounting for any stock split, consolidation or any other M&A deals
- The FY21 financials are on the basis of the mean broker estimates from Thomson Reuters – Seeking Alpha has different and slightly outdated ones
Investment Risks & Mitigants / Outstanding DD points Exposure to changing regulation - US is only a small part of the market which High Tide addresses, while a change in regulation would have a big impact on the company, currently it is unlikely this would happen, given the discussions about potential federal legalization
- Canada regulation is established and not going anywhere
- Other countries likely to legalize and regulate cannabis, as outlined earlier
Dilution - No escaping that there will be some significant dilution for shareholders, as pointed out in the table below, but this should be already priced into the stock
- Potential that new equity issuances could occur to help finance growth, but provided this growth is delivered, it should be accretive for the stock price
https://preview.redd.it/n8dzmapozmg61.png?width=602&format=png&auto=webp&s=12e0e8bbd93f0c5c17920e7a5c5fad2559cc8bf0 Potentially misleading cost basis information - A risk that investors need to be aware with for all companies which have relied on government financial support during COVID-19 measures. Such support has resulted in the number of businesses going bankrupt decreasing massively – this is at a lower level than it ever normally is and is masking some real underlying issues within companies. As investors we need to be open eyed about this
- As High Tide has benefited from support in the form of the Canada’s Emergency Wage Support scheme, there is the risk that once this is lifted it may become apparent that the cost base has not been effectively managed
- Personally, I think this is mitigated by the synergy analysis conducted as part of the M&A. A full cost base analysis would have been conducted to calculate the potential $8.4m synergies so strong likelihood that this is under control, but should keep on our radar and reassess
Marketing expenses and celebrity licenses - Need more information to ascertain whether these are underpinned by a compelling ROI. Seen a lot of people suggest this is a great positive, but the impact on sales volumes from these is unknown, as is the terms of these license agreements (e.g. split between upfront fee vs. volume-based fee)
- No escaping the fact that it is an increased cost and so need to understand the ROI this generates to determine whether it really is compelling
- Is there really more demand to pay a premium for Snoop Dogg bongs, Guns n Roses papers, Cheech & Chong grinders, or whatever they may be?
- So far management have suggested this has been helpful in driving new sales, but this is something to dig into more
If you want to check out the video, it would be appreciated:
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