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We are initiating coverage of High Tide Inc.

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Alwaysbmikki   Thursday, 07/18/19 12:29:31 PM
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We are initiating coverage of High Tide Inc. with a SPECULATIVE BUY recommendation
and C$0.60 target price. High Tide is focused on establishing a large cannabis retail
presence, augmented by accessory manufacturing and distribution. With a growing retail
presence in Canada and strong platform to expand into the US, we are forecasting a 5-
year revenue CAGR of ~30%, along with several material potential catalysts that could
result in a re-rating.
Investment highlights
• Management experience. With 49% insider ownership, management has operated in
the legal cannabis retail sector for a decade. We believe HITI will leverage its industry
knowledge through business development opportunities, optimized retail locations
and accretive acquisitions. As validation of management, both Aurora and Aphria
have invested in High Tide ($11M and $4.5M, respectively, in $0.75/sh convertible
• Established wholesale. Through its wholesale brands (RGR Canada and Famous
Brandz), High Tide has been manufacturing and distributing cannabis accessories
since 2011. With a portfolio of over 4,000 SKUs and proprietary celebrity brands
(including Snoop Dogg Pounds, Trailer Park Boys and Guns N' Roses), we believe the
company is well positioned to provide B2B accessories to the growing North American
dispensary market.
• Growing retail portfolio. High Tide plans to leverage its retail experience and existing
Smoker's Corner locations through two new cannabis retail chains, Canna Cabana and
Kush Bar. The company is targeting over 100 retail locations including 21 locations by
the end of the summer, including three affiliate stores operating in Ontario. While we
believe retail is generally quite competitive, we forecast above-average retail margins
through the introduction of house-branded products over the coming year.
• Online platform supporting retail and wholesale segments. In December 2018, HITI
acquired Grasscity, an established Amsterdam-based retailer with over 20 years of
online experience and over 5.8M annual site visitors. We believe the acquisition could
be highly accretive given the opportunity to introduce CBD products to the platform,
increase online conversion rates and incorporate RGR and Famous Brandz wholesale
accessories into the Grasscity catalogue.
• Potential catalysts. Potential catalysts include additional retail licences (~10 over the
next two months), contracts to establish in-house brands, the potential buy-out of three
Ontario stores, the launch of CBD sales in the US and EU, acquisitions, and large B2B
wholesale orders from US and Canadian retailers.
Valuation. Based on a self-funded DCF model (which captures 35 cannabis retail stores
by the YE20 and a WACC of 15.8%), we estimate a value of $0.61/sh, which forms the
basis of our C$0.60/sh target. With potential upside of 114% to the current share price,
we are initiating with a SPEC BUY rating. Our valuation implies a conservative 2021E
EV/EBITDA multiple of 5.9x versus the current multiple of 2.3x. The key risks to our
estimates include retail licensing and the company's ability to generate cash flow to
support our growth estimates. Given the company's limited balance sheet and early
stage in a high-risk sector, we believe a Speculative rating is appropriate.
Nick Kuzyk, MBA| Chief Strategy Officer & SVP Capital Markets
D: 1.403.770.9435 Ext. 115 | C: 403.978.3801
E: nick@hightideinc.com
A: #112, 11127 15th Street NE | Calgary, AB T3K 2M4
W: www.hightideinc.com

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