Planet 13's Cannabis Superstore And Florida Expansion: Is A Merger In The Air?

Equity research firm Zuanic & Associates initiates coverage of Planet 13 Holdings Inc. PLNHF with an Overweight rating, highlighting that the stock's valuation doesn't fully capture the potential of its unique and scalable superstore concept.

Despite potential execution risks, Planet's growth initiatives are expected to drive more than 60% cumulative top-line growth by CY25. This growth is anticipated even with a >30% share count increase resulting from the VidaCann acquisition.

Expansion and Growth Initiatives

Planet 13 currently has two stores in Nevada, a superstore in Santa Ana, California and plans to open a mid-size store in Illinois. The acquisition of VidaCann in Florida is expected to make Florida the second-largest state for Planet 13 with the potential for significant growth in that market.

Planet 13 has expanded the Las Vegas complex to include a restaurant, bar, apparel sections, and memorabilia, with plans for a consumption lounge and a cannabis-themed museum.

While attracting only 4% of Las Vegas visitors, the company aims to increase foot traffic. Delivery and curbside pickup services have been implemented to accommodate changing consumer preferences.

Planet 13's VidaCann Acquisition - Florida Market Expansion

The acquisition of VidaCann positions, Planet 13 is a key player in the Florida market, offering a strong dispensary network, a complementary brand portfolio and an opportunity to expand revenue generation. VidaCann holds Florida's 9th largest dispensary network with 26 dispensaries.

This deal involves the issuance of 78.5 million shares and $9 million in cash, set to be finalized by January 2024.

Pablo Zuanic, the senior analyst at Z&A, noted: “VidaCann operated 26 stores as of September 8, 2023, with the most recent store opening in late September 2022 (...) held a 1.6% volume share in both flower and non-flower categories in the second quarter of 2023.”

Planet 13 Superstore Concept

The Planet 13 superstore in Las Vegas is a standout feature, offering a massive 122,000 sq ft complex within walking distance of the Las Vegas Strip.

It is the largest dispensary globally, generating over $60 million in annual sales, over 10 times the state average.

The superstore provides a unique and immersive retail experience, featuring drones, robotics, 3-D mapping projections, and customer-facing production.

While there are numerous dispensaries in the vicinity, Planet 13's concept stands out, making it a must-visit destination for both locals and tourists.

Potential for Merger

Planet 13 offers a long-term upside. Given the unique superstore concept, Planet 13 could become an attractive acquisition target for other Multi-State Operators (MSOs), both public and private.

Zuanic highlighted a hypothetical merger with a private MSO, like PharmaCann, could be a way to roll out the superstore concept across the United States.

The company's unique concept and scalable nature make it a promising player in the evolving industry. Zuanic noted that the firm's management envisions store customization through a state-by-state lens.

However, challenges include execution risks, state regulations, licensing availability, location suitability, integration of the VidaCann acquisition, and profitability improvement in non-Nevada locations.

Financials and Projections

Planet 13's financial performance is on the lower end among MSOs, with negative margins and operating cash flow.

The company's gross margins align with the group average at 43.5%, while SGA costs, at 116%, are higher than the group average of 109%, attributed to startup expenses in Illinois and Florida, and the overhead in Santa Ana.

With negative EBITDA margins at -0.3% for the L12M and -2% in 2Q23, the firm it's one of seven MSOs with negative operating cash flow in the same period.

“With a net cash position of $41 million, it has the potential to fund up to $90 million by gearing up to 0.5 times its sales. The management has been cautious in managing its balance sheet, opting for stock-funded deals like the VidaCann acquisition,” Zuanic wrote.

“On the flip side, profitability remains a challenge, largely due to the nascent nature of its businesses outside of Nevada,” Zuanic continued. “The stock currently trades in line with the group average, and we anticipate the limited potential for a re-rating, (...)”

“In our view, the bear case primarily revolves around the investments made in Illinois, Florida, and the Las Vegas superstore not yielding desired results, resulting in cash burn and unimproved profitability. Considering these factors, we see value in PLNH shares at these levels and initiate an Overweight rating,” concluded the analyst.

Despite ranking 15th among 20 MSOs with $26 million in 2Q23 sales, PLNH stands out with a projected cumulative top-line growth of 65% between 2023-2025.

Photo by Markus Winkler on Unsplash.