Fire & Flower Holdings: Analyst Reduces Price Target To $1.65 And Remains Neutral

Fire & Flower Holdings Corp. FFLWF FAF FAF released its financial and operational results for fiscal 2022 third quarter ended October 29, 2022, revealing revenue of CA$43.8 million ($32.2 million) for Q3 2022, representing an increase of 8% from CA$40.7 million in the previous quarter and a decrease of 3% from CA$45.4 million in the prior year comparative period.

The Analyst

According to Cantor Fitzgerald’s Pablo Zuanic: “We stay Neutral and lower our 12-month price target to C$1.65 from C$1.95 due to reduced estimates. Moreover, “We attach our updated model following the release of the Oct qtr print and adjust our model for the shift in the fiscal year to Dec from Jan.” 

The Thesis

In Zuanic’s view, as company retail sales increased 9% sequentially in the October quarter “in a market we estimate grew 5%; retail segment gross margins increased 100bp seq to 24.3%, and EBITDA trends improved (-$2.8Mn vs. -6Mn).” The company's performance is encouraged considering a tough retail climate, according to the analyst.

Moreover, management describes the pricing strategy as “high-low” with more surgical discounting for members in the loyalty program, rather than “blanket discounting.” 

In addition, the guidance calls for positive EBITDA "by 1H23 and positive FCF by 2H23; it expects to capture market growth both via M&A and organically," said the analyst.

Keeping "A Constructive Stance"

Zuanic noted that the company’s new stores in Canada may include standard shops as well as those collocated at Circle-K outlets, “estimating the net economics for FAF representing $75-100K per store.”

Although "we rate the stock Neutral, we keep a constructive stance because of the ACT angle and because of what we think is a more tailored approach to pricing," he added.

Valuation and price target (all in C$): The company shares "are down 44% in the last 3 months vs. a 19% drop in the YOLO ETF," Zuanic said.

"We continue to take 0.7x on our CY24 sales estimates, which yields a price target of $1.65 by Dec'23. Given sector volatility, we look for a>50% upside to rate stocks Overweight," the analyst concluded.

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