High Tide: Leading Cannabis Retailer With Upside In 2021
Mar. 12, 2021 Seeking Alpha
High Tide is the largest cannabis retailer in Canada after acquiring Meta Growth in November 2020.
With 72 existing stores expanding to 115 by the end of 2021, we think the company will see strong revenue growth and margin expansion.
Given our favorable view of the industry in 2021 and High Tide's leading market share, we are bullish on the stock.
High Tide (OTCQB:HITIF) has emerged as one of the two front-runners in the Canadian cannabis retail industry. The company just completed its merger with Meta Growth, formerly known as National Access Cannabis, to become the largest cannabis retailer in Canada by market cap and revenue. Further, we think the Canadian retail market is poised for strong growth in 2021 as COVID-related restrictions begin to be lifted and Ontario continues to ramp up its retail store rollout; High Tide is well-positioned within the sector.
Company Overview
High Tide was founded in 2018 right around Canada's legalization of cannabis. The company received initial investments from large LPs including Aurora Cannabis (ACB) and Aphria (APHA) which provided the initial capital. Since then, the company has expanded through organic store openings, single-store buyouts, and a large takeover of its competitor Meta Growth in 2020. High Tide is a pure-play cannabis retailer with no cultivation assets which allows it to bypass the Ontario government's limit on vertical integration for LPs (LPs are allowed the maximum 25% ownership in retailers). Through aggressive expansions and a not very competitive retail market overall, High Tide and Fire & Flower (OTCQX:FFLWF) have emerged as the top two largest cannabis retailers in Canada with similar retail footprints.
High Tide acquired Meta Growth in November 2020 which propelled it past Fire & Flower to become the largest company by market cap and revenue. Pro forma for the deal, High Tide has 72 open retail stores across Canada with its primary focus on Alberta and Ontario. The company has no presence in British Columbia and has highlighted Ontario as the biggest opportunity for 2021. The Ontario government is set to further relax the maximum retail cap from 30 currently to 75 on September 31, 2021.
The all-stock deal is unsurprising given the need to consolidate in an industry that has been hammered since the beginning. The Canadian legalization rollout was a disaster and the retail sector was the hardest hit. First of all, many provinces elected to control the distribution through government-owned stores including Quebec and the Maritime provinces; Quebec is the second-largest province by population so that is not ideal for retailers. Then, Ontario really dragged its feet on the retail licensing with its first store only opened in April 2019 and only 24 stores across the province by the end of 2019. Fortunately, Ontario ramped up its retail licensing to 30 per week recently and has close to 500 stores open now and close to 1,000 applications waiting in the queue. We think Ontario could support >1,000 cannabis stores given its government-run LCBO liquor chain has close to 700 stores. For High Tide and competitors like Fire & Flower, the key is to secure highly-desirable locations given the stores are likely to have very different levels of profitability.
High Tide also owns Grasscity which is an Amsterdam-based global e-commerce site for smoking and cannabis consumption accessories. High Tide acquired the business in 2018 but the business has been operating for 20 years. Then in January 2021, it announced the acquisition of a U.S.-based Smoke Cartel (OTCQB:SMKC) to further expand its online business. High Tide is paying US$8M Smoke Cartel High Tide estimates its U.S. run-rate revenue reached $25M already based on its two online sites. We think these consumption accessory websites are not going to be the main profit drivers in the foreseeable future as the markets are highly fragmented, competitive, and mature. Smoke Cartel's abysmal share price outlines its past performance.
Financials & Valuation
High Tide has a market cap of ~$500M and trades at 3.3x EV/Sales and EV/EBITDA assuming $150M run-rate revenue and $18M EBITDA including full contributions from Meta Growth. The valuation is in-line with Fire & Flower trading at 3.1x EV/Sales and the two firms both have ~70 stores nationally. What will be important to see is the level of profitability and sales per store for both companies once more comparable data is released. High Tide's last quarter closed on October 31, 2020, but its Meta Growth deal closed on November 18 which means that the next quarter should provide a good view of the combined company. High Tide has good gross margins at 38% which is higher than 35% reported by Fire & Flower and it also reported a 15% EBITDA margin which is higher than Fire & Flower at only 4%. High Tide has been EBITDA positive for three quarters while Fire & Flower only did that last quarter; High Tide also plans to extract synergies from the Meta Growth deal which should provide extra efficiency gains over time.
High Tide is shaping up to be one of the top consolidators in the cannabis retail sector given its strong balance sheet and access to capital. The company announced its application to list on Nasdaq which will further enhance its investor base. With $38M of cash after the Meta Growth acquisition, the company also pushed out the maturity of its convertible debt. Therefore, we think High Tide has sufficient capital to fund its 2021 growth pipeline.
Risk Factors
The biggest risk for High Tide is the barrier to entry within the Canadian market. As we discussed above, each Canadian province has a different system for cannabis distribution; the largest market Ontario is currently issuing 30 new licenses per week with no upper limit. Therefore, it is possible that the market will become overcrowded which could pressure incumbents such as High Tide. However, the risk of over-saturation is low thus far because we think the Ontario market could support at least 1,000 stores but it only has about 1/3 of that number opened right now. High Tide also has secured prime real estate through acquisitions and store openings which serve as its competitive advantage. Lastly, the company has access to capital that independent businesses lack so it will be long-term survivors.
Outlook
We think High Tide is fairly valued and it remains in the middle of a major growth phase. The company plans to have 30 stores in Ontario by mid-2021 and continue to expand after the cap will be increased to 75. Alberta is another major market for the company but growth will slow as the province is likely saturated and competition could increase. The company has not entered the British Columbia market which remains an opportunity in the long term. However, Ontario is clearly the place to be and High Tide will be well-positioned to acquire and open new stores given its balance sheet and access to capital. We don't foresee any other major competitors emerging in the near-term which means that High Tide and Fire & Flower have first-mover advantages in the sector. The company is also looking to expand into the U.S. but Canada will remain its main market for the next few years. Given our favorable view of the Canadian cannabis retail sector and High Tide's leading market share, we are bullish on its stock.
