As Consolidation Hits Canadian Cannabis Retail This Undervalued Stock Appears On Analyst's Radar

Canadian cannabis retailer High Tide Inc HITI HITIF recently announced that it's transitioning all of its cannabis retail stores to an innovative cannabis discount club concept that will offer benefits and lower prices for its Cabana Club loyalty members.

As of October, all of the company's retail cannabis shops began offering steep club discounts on cannabis products in addition to existing member-only discounts on consumption accessories, as well as other exclusive benefits for more than 245,000 Cabana Club members.

And it seems that "investors have rewarded" the company for making the move, said Cantor Fitzgerald's analyst Pablo Zuanic in his latest note. The stock gained 8% over the last month, compared to its fellow Canadian cannabis retailer Fire & Flower Holdings Corp.'s FAF FFLWF stock, which plunged 19% over the same period.

High Tide's shares traded slightly up on Monday upon announcing the $31.24 million acquisition of an 80% stake in NuLeaf Naturals, LLC. On Tuesday, the company's stock traded 1.63% lower at $6.63 per share.

The Analyst

Zuanic initiated coverage of the company's stock with a Neutral rating and a 12-month price target of CA$8.75 ($6.9).

The Thesis

The analyst said the company is trying to "adapt for a more competitive and crowded retail landscape."

He sees an opportunity with Canada's largest cannabis retail chains as "these stocks are undervalued vs. domestic cannabis producers, and trade at a steep discount to U.S. retail staples peers on a growth-adjusted basis."

High Tide currently runs 104 stores, a global accessories arm and a growing CBD business, with management aiming for 110 stores by the year-end and 200 in the future. The company is converting all of its stores to discount membership mode in reaction to market conditions while expecting some meaningful results within the next six months.

Moreover, according to its latest earnings report, High Tide's quarterly revenue nearly doubled to CA$48.1 million ($38 million).

"As the industry continues to grow and consolidate, we believe High Tide is well-placed to gain market share both organically and via M&A," Zuanic said.

With Canada's three-tier structure for cannabis, which protects "retailers' fiefdoms' and puts them in a good position to consolidate the fragmented sector", the four largest retail chains, Inner Spirit Holdings ISH INSHF, Nova Cannabis NOVC NVACF, High Tide, and Fire & Flower, account for only 15% of the market, the analyst said.

Out of these, Zuanic prefers Fire & Flower over High Tide, "on valuation (CY22 sales 1.0x vs. 1.4x, respectively), less execution risk, and strategic partners."

Accessories Business And CBD Arm

High Tide also produces and distributes smoke-related accessories. Over the past year, it acquired several e-commerce platforms that sell accessories, including Smoke Cartel and Daily High Club, to name a few, which are joining Grasscity, owned by the company since 2018.

The analyst added that High Tide's decision to move to discount retailing in Canada has enabled it to make accessories available through its own stores and e-commerce platforms.

High Tide has been growing its CBD arm as well, with the acquisitions of the U.S.-based Fab Nutrition and Blesses CBD, a UK-based direct-to-consumer derived CBD brand.

"With a current annual run rate of revenues in the U.S. exceeding $50 million, the company feels it is excellently positioned to lever its U.S. customer base to also sell cannabis once permissible by federal regulations and/or exchange policy," Zuanic explained.

The analyst added that he "would become more constructive" on the company as he begins to "see results from the conversion to the discount membership model and organic growth at the various accessories/CBD assets recently acquired."

Photo: Courtesy of M. B. M. on Unsplash