HITI Echelon Research Report -

Please enable JavaScript to view the full PDF

20 July 2021 Special Situations High Tide, Inc. HITI-TSXV: $7.88 Speculative Buy Continues US E-Commerce Roll-up Strategy with DankStop Acquisition, Immediately Accretive and Able to Accelerate Growth $20.00 Target Event: High Tide, Inc. (“High Tide” or “the Company”) announced a definitive agreement to Projected Return: 154% acquire DS Distribution (“DankStop”, private), a US e-commerce retailer of consumption Valuation: DCF, 11% Discount Rate, accessory products. This acquisition will bolster High Tide’s exiting e-commerce accessory 17.5x exit multiple on FCF business, where pro forma annualized US revenues would be ~$55M (prev. ~$50M) following High Tide, Inc. CAD Unless Noted the DankStop acquisition. High Tide will pay US$3.85M in stock as consideration. Market Cap. (PD, $M) 484.6 Net Debt (PD, $M) (3.2) The acquisition is expected to be immediately accretive. DankStop generated TTM revenues of Capitalized Leases ($M) Potential Proceeds from Dilutive Securities ($M) 28.6 50.0 US$3M as of April 30 and produced low double-digit EBITDA margins. We believe there are Enterprise Value ($M) 460.0 Basic Shares O/S (M) 50.6 clear revenue growth and cross-selling opportunities upon closing the transaction, which is Partially Diluted Shares (M) 61.5 Avg. Daily Volume (M) 0.5 expected in the coming weeks. 52 Week High (C$) 16.95 52 Week Low (C$) 2.10 Financial Metrics We note High Tide also announced this morning that it closed the previously announced 31-Oct F2020A F2021E F2022E acquisition of Daily High Club for US$10M, adding a subscription box offering to its existing US Revenue ($M) 83.3 186.3 314.5 Adj. Gross Margin (%) 37% 37% 36% accessory operations. High Tide now owns 3 of the 5 of the most popular pure-play online Adj. EBITDA ($M) 8.2 22.7 53.8 Valuation Data cannabis accessory retailers, giving it a strong leadership position in the accessory e-commerce EV/Sales Current 5.5x 2.5x 1.5x marketplace. See our Daily High Club note here. Target 16.1x 7.2x 4.3x EV/EBITDA Current nmf 20.2x 8.5x Target nmf 59.1x 24.9x We reiterate our Speculative Buy rating and our price target of $20.00/shr based on a DCF Quarterly Data valuation of $19.58/shr. Q121A Q221E Q321E Q421E Revenue ($M) 38.3 40.9 47.8 59.3 Adj. Gross Margin (%) 39% 37% 36% 36% ▪ Overview of Key Transaction Terms – High Tide agreed to acquire all of DankStop for Adj. EBITDA ($M) 4.6 4.7 5.3 7.7 US$3.85M payable in shares, priced at the 10-day VWAP as of closing the transaction. Company Description DankStop is expected to have US$100K cash on hand upon closing the transaction, and non- High Tide is a Canadian retailer, distributor, and e-commerce provider cash working capital of US$220K. The transaction is expected to close in the coming weeks of legal adult-use cannabis products and related accessories. The Company's retail segment operates licensed cannabis stores in Canada, according to the Company. We believe this acquisition represents a net valuation multiple as well as e-commerce smoking accessory platforms. High Tide’s wholesale operations oversee the design, manufacture, and of 1.25x DankStop’s TTM revenue as of April 30 (net of cash acquired), and a trailing EBITDA distribution of smoking accessory products. multiple in the mid-to-high single-digit range. $20.00 6.0 ▪ DankStop Complements High Tide’s Existing E-Commerce Business, Revenue Synergy $15.00 5.0 4.0 Opportunities – We see plenty of opportunities to drive revenue synergies upon closing the $10.00 3.0 2.0 $5.00 1.0 acquisition. DankStop has already garnered a strong online following, recording 2.5M site $0.00 0.0 visits in 2020, 200K email subscribers, and 335K Instagram followers. High Tide will have opportunities to increase commercialization of these potential customers, including higher Volume (M) Price (C$) conversion rates, more frequent purchases, and introducing this large network to High Source: Company Filings (historical financials), Echelon Capital Tide’s other e-commerce platforms (Grasscity, Smoke Cartel, Daily High Club, and FABCBD). Markets (estimates), FactSet (share pricing) High Tide is also likely to enhance vertical integration across its channels, selling more of its own branded products on the DankStop e-commerce store to capture additional margin. We believe these synergies will accelerate growth for DankStop and improve profitability. We view this acquisition to be on strategy for High Tide, and believe it retains a deep pipeline of US e-commerce acquisition opportunities to capitalize on in the coming months. ▪ High Tide Closes Daily High Club Acquisition – Please see our Daily High Club note for full details. Daily High Club offers a rapidly growing subscription box model, which charges members a monthly fee to receive a box of cannabis accessories on a monthly basis. The subscription model creates a sticky customer base, generating recurring and predictable revenues. In addition to its subscription box model, Daily High Club also acts as a regular Andrew Semple, CFA | 416.687.6656 | [email protected] Page 1 of 6 High Tide, Inc. (HITI-TSXV) | 20 July 2021 e-commerce retailer of cannabis accessories. Daily High Club has 15,000 active subscribers and has sold over 1M cannabis accessories to date. The transaction is an excellent fit for High Tide, as Daily High Club provides the Company with a new offering (subscription boxes), is complementary to existing US e-commerce operations, and offers clear revenue synergy opportunities. ▪ Changes to Estimates, Adding DankStop to Financial Forecasts – We are including DankStop into our financial estimates, with closing of the transaction expected shortly in the coming weeks. We model first contribution in FQ421 results for the quarter ended October 31, 2021. We raised our 2022 sales and EBITDA estimates for the acquisition. We expect strong organic growth over time driven by the aforementioned revenue synergy opportunities as well as organic growth, and believe our initial estimates for the DankStop acquisition are conservative. Exhibit 1 – Financial Forecasts In $M F2020A FQ121A FQ221A FQ321E FQ421E F2021E F2022E Revenue $83.3 $38.3 $40.9 $47.8 $59.3 $186.3 $314.5 New Adj. Gross Margin 37.0% 38.5% 36.7% 36.2% 35.7% 36.6% 36.1% Estimates Adj. EBITDA $8.2 $4.6 $4.7 $5.3 $7.7 $22.7 $53.8 Revenue $83.3 $38.3 $40.9 $47.8 $58.5 $185.5 $309.5 Former Adj. Gross Margin 37.0% 38.5% 36.7% 36.2% 35.6% 36.6% 35.9% Estimates Adj. EBITDA $8.2 $4.6 $4.7 $5.3 $7.6 $22.6 $52.4 Revenue $83.3 $36.3 $40.9 $51.5 $56.4 $187.3 $294.1 Consensus Adj. Gross Margin 36.0% 38.6% 33.8% 36.0% 30.0% 34.2% 35.4% Adj. EBITDA $8.6 $4.6 $4.3 $6.6 $7.7 $23.2 $56.0 Source: FactSet, Echelon Capital Markets ▪ Valuation Remains Attractive with >150% Upside Expected in the Next 12 Months – High Tide trades at an attractive valuation of 8.5x EV/2022E EBITDA based on our estimate compared to the cannabis retailer average multiple of 11.5x 2022E EBITDA, and ~14.5x 2021E multiple for comparable retailers from other industries. We continue to see upside to High Tide’s valuation upon future M&A announcements, which should prove to be a tailwind to financial forecasts and valuation multiples. Andrew Semple, CFA | 416.687.6656 | [email protected] Page 2 of 6 High Tide, Inc. (HITI-TSXV) | 20 July 2021 High Tide, Inc. (HITI-TSXV, $7.88) - Data Sheet Speculative Buy | PT: $20.00 Company Description Consensus 3 Mths Ago Current Return $16.00 6.0 Rating: NA Buy $14.00 Target: NA $17.50 122% 5.0 High Tide is a Canadian retailer, distributor, and e- $12.00 Median: $18.75 $17.50 122% 4.0 commerce provider of legal adult-use cannabis products $10.00 High: $21.00 $20.00 154% and related accessories. The Company's retail segment $8.00 3.0 Low: $16.50 $15.00 90% operates licensed cannabis stores in Canada, as well as e- $6.00 2.0 Consensus Distribution commerce smoking accessory platforms. High Tide’s $4.00 Sector Outperform/Buy 2 1.0 wholesale operations oversee the design, manufacture, $2.00 Sector Perform/Hold 0 and distribution of smoking accessory products. $0.00 0.0 Sector Underperform/Sell 0 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 # Est 2 Volume (M) Price (C$) Total Addressable Market Opportunity Store Photos Key Financial Metrics Key Statistics Value Financial Summary F2019A F2020A FQ121A FQ221A FQ321E FQ421E F2021E F2022E 52-Week High $16.95 115% Consolidated, $M (CAD unless noted) 52-Week Low $2.10 (73%) Revenue 31.3 83.3 38.3 40.9 47.8 59.3 186.3 314.5 Avg Vol (3-Mo, M) 0.5 Growth y/y 258% 166% 179% 99% 98% 119% 124% 69% Partially Diluted Shares Outstanding (M) 61 Cons. 31.3 83.3 36.3 40.9 47.7 57.2 184.3 292.3 Market Cap (PD, $M) 485 Net Debt (PD, Incl. Leases, $M) -3 Gross Margin 36% 37% 39% 37% 36% 36% 37% 36% Enterprise Value (PD, Incl. leases, $M) 460 Cons. 36% 36% 41% 37% 35% 34% 36% 36% FYE Oct 31 Adj. EBITDA (15.9) 8.2 4.6 4.7 5.3 7.7 22.7 53.8 Growth y/y nmf nmf nmf 166% 55% 112% 178% 137% Valuation Multiples Current At Target Margin (51%) 10% 12% 12% 11% 13% 12% 17% F2019 14.7x 42.9x Cons. (15.9) 8.6 4.6 4.7 5.1 6.8 21.3 49.7 F2020 5.5x 16.1x EV/Sales F2021 2.5x 7.2x Net Income (26.3) (6.4) (16.8) (12.3) (1.2) 2.0 (28.3) 22.5 F2022 1.5x 4.3x Diluted EPS ($1.99) ($0.42) ($0.62) ($0.30) ($0.02) $0.03 ($0.67) $0.37 F2019 nmf nmf Adj. Diluted EPS ($1.68) ($0.47) ($0.20) ($0.18) $0.00 $0.03 ($0.26) $0.37 F2020 56.2x 164.0x EV/EBITDA Growth y/y (Adj EPS) nmf nmf nmf nmf nmf nmf nmf nmf F2021 20.2x 59.1x Cons. ($1.95) ($0.45) ($0.30) ($0.02) $0.00 $0.03 ($0.26) $0.35 F2022 8.5x 24.9x F2019 nmf nmf Net Debt (Incl. leases) 26.0 45.9 75.4 28.6 27.5 28.5 28.5 6.8 F2020 nmf nmf P/E Operating Cash Flow ($M) ex. NWC (14.7) 8.0 4.9 4.1 3.9 7.1 19.9 46.7 F2021 nmf nmf CAPEX ($M) (incl. Acquisitions) (16.9) (5.0) 8.5 (9.0) (21.5) (2.9) (24.9) (11.5) F2022 21.6x 57.8x Unlevered FCF (ex. rent) (29.8) 8.2 11.3 (12.0) (18.6) 1.1 (18.2) 33.6 Unlevered FCF (incl. rent) (29.8) 5.0 10.2 (13.3) (20.2) (0.6) (23.8) 23.5 Discount Rate Unlevered FCF (ex. rent) Yield to EV (6%) 2% 10% (10%) (16%) 1% (4%) 7% Valuation Sensitivity 9.0% 11.0% 13.0% 13.5x $16.90 $15.58 $14.38 Other Metrics F2019A F2020A FQ121A FQ221A FQ321E FQ421E F2021E F2022E 15.5x $19.07 $17.58 $16.23 Exit FCF 17.5x $21.24 $19.58 $18.07 Multiple Adj. Return on Assets (ROA) (54%) (10%) (13%) (15%) 0% 3% (5%) 9% 19.5x $23.42 $21.58 $19.92 Adj. Return on Invested Capital (ROIC) (56%) 3% (1%) (3%) 1% 3% 1% 25% 21.5x $25.59 $23.58 $21.77 Adj. Return on Equity (ROE) (231%) (70%) (44%) (29%) 1% 6% (8%) 14% Source: Company Filings, Company Documents, FactSet, Statistics Canada, Arcview Market Research, Echelon Capital Markets Andrew Semple, CFA | 416.687.6656 | [email protected] Page 3 of 6 High Tide, Inc. (HITI-TSXV) | 20 July 2021 Important Information and Legal Disclaimers Echelon Wealth Partners Inc. is a member of IIROC and CIPF. The documents on this website have been prepared for the viewer only as an example of strategy consistent with our recommendations; it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy. Any opinions or recommendations expressed herein do not necessarily reflect those of Echelon Wealth Partners Inc. Echelon Wealth Partners Inc. cannot accept any trading instructions via e-mail as the timely receipt of e-mail messages, or their integrity over the Internet, cannot be guaranteed. Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future. All securities involve varying amounts of risk, and their values will fluctuate, and the fluctuation of foreign currency exchange rates will also impact your investment returns if measured in Canadian Dollars. Past performance does not guarantee future returns, investments may increase or decrease in value and you may lose money. Data from various sources were used in the preparation of these documents; the information is believed but in no way warranted to be reliable, accurate and appropriate. Echelon Wealth Partners Inc. employees may buy and sell shares of the companies that are recommended for their own accounts and for the accounts of other clients. Echelon Wealth Partners compensates its Research Analysts from a variety of sources. The Research Department is a cost centre and is funded by the business activities of Echelon Wealth Partners including, Institutional Equity Sales and Trading, Retail Sales and Corporate and Investment Banking. Research Dissemination Policy: All final research reports are disseminated to existing and potential clients of Echelon Wealth Partners Inc. simultaneously in electronic form. Hard copies will be disseminated to any client that has requested to be on the distribution list of Echelon Wealth Partners Inc. Clients may also receive Echelon Wealth Partners Inc. research via third party vendors. To receive Echelon Wealth Partners Inc. research reports, please contact your Registered Representative. Reproduction of any research report in whole or in part without permission is prohibited. Canadian Disclosures: To make further inquiry related to this report, Canadian residents should contact their Echelon Wealth Partners professional representative. To effect any transaction, Canadian residents should contact their Echelon Wealth Partners Investment advisor. U.S. Disclosures: This research report was prepared by Echelon Wealth Partners Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Echelon Wealth Partners Inc. is not registered as a broker-dealer in the United States and is not be subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. Any resulting transactions should be effected through a U.S. broker-dealer. U.K. Disclosures: This research report was prepared by Echelon Wealth Partners Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. ECHELON WEALTH PARTNERS INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS. The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Copyright: This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express written consent of Echelon Wealth Partners. ANALYST CERTIFICATION Company: High Tide, Inc. | TSXV:HITI I, Andrew Semple, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report. IMPORTANT DISCLOSURES Is this an issuer related or industry related publication? Issuer Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer? No If Yes: 1) Is it a long or short position? No Position; and, 2) What type of security is it? None. The name of any partner, director, officer, employee or agent of the Dealer Member who is an officer, director or employee of the issuer, or who serves in any advisory No capacity to the issuer. Does Echelon Wealth Partners Inc. or the Analyst have any actual material conflicts of interest with the issuer? No Does Echelon Wealth Partners Inc. and/or one or more entities affiliated with Echelon Wealth Partners Inc. beneficially own common shares (or any other class of No common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer? During the last 12 months, has Echelon Wealth Partners Inc. provided financial advice to and/or, either on its own or as a syndicate member, participated in a public Yes offering, or private placement of securities of this issuer? During the last 12 months, has Echelon Wealth Partners Inc. received compensation for having provided investment banking or related services to this Issuer? Yes Has the Analyst had an onsite visit with the Issuer within the last 12 months? (December 14, 2020: Toured Toronto retail store) Yes Has the Analyst or any Partner, Director or Officer been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months? No Has the Analyst received any compensation from the subject company in the past 12 months? No Is Echelon Wealth Partners Inc. a market maker in the issuer’s securities at the date of this report? No Andrew Semple, CFA | 416.687.6656 | [email protected] Page 4 of 6 High Tide, Inc. (HITI-TSXV) | 20 July 2021 RATING DEFINITIONS The security represents attractive relative value and is expected to appreciate significantly from the current price over the next 12 month time Buy horizon. Speculative Buy The security is considered a BUY but in the analyst’s opinion possesses certain operational and/or financial risks that are higher than average. Hold The security represents fair value and no material appreciation is expected over the next 12-18 month time horizon. Sell The security represents poor value and is expected to depreciate over the next 12 month time horizon. While not a rating, this designates the existing rating and/or forecasts are subject to specific review usually due to a material event or share price Under Review move. Echelon Wealth Partners recommends that investors tender to an existing public offer for the securities in the absence of a superior competing Tender offer. Applies to former coverage names where a current analyst has dropped coverage. Echelon Wealth Partners will provide notice to investors Dropped Coverage whenever coverage of an issuer is dropped. RATINGS DISTRIBUTION Recommendation Hierarchy Buy Speculative Buy Hold Sell Under Review Restricted Tender Number of recommendations 26 34 1 0 50 1 0 % of Total (excluding Restricted) 23% 31% 1% 0% 45% Number of investment banking relationships 15 26 0 0 14 1 0 % of Total (excluding Restricted) 27% 47% 0% 0% 25% PRICE CHART, RATING & PRICE TARGET HISTORY Date Target Rating High Tide, Inc. (HITI-CAN) 24 Aug 2020 $7.50 Speculative Buy $25.00 13 Sep 2020 RESTRICTED $20.00 28 Oct 2020 $7.50 Speculative Buy 19 Nov 2020 $9.00 Speculative Buy $15.00 1 Feb 2021 RESTRICTED 23 Feb 2021 $13.50 Speculative Buy $10.00 1 Apr 2021 $16.50 Speculative Buy $5.00 3 May 2021 $18.00 Speculative Buy 18 May 2021 RESTRICTED $0.00 26 May 2021 $20.00 Speculative Buy Jul 20 Sep 20 Nov 20 Jan 21 Mar 21 May 21 Jul 21 Coverage Initiated: Jul 29, 2020 Price Price Target Revisions Data sourced from: FactSet Note: Price targets and share price data prior to May 13, 2021 have been adjusted to reflect a 1-for-15 share consolidation. Andrew Semple, CFA | 416.687.6656 | [email protected] Page 5 of 6 High Tide, Inc. (HITI-TSXV) | 20 July 2021 Toronto Wealth Management Toronto Capital Markets Montreal Wealth Management and Capital Markets 1 Adelaide St East, Suite 2000 1 Adelaide St East, Suite 2100 1000 De La Gauchetière St W., Suite 1130 Toronto, ON M5C 2V9 Toronto, Ontario M5C 2V9 Montréal, QC H3B 4W5 416-572-5523 416-572-5523 514-396-0333 Calgary Wealth Management Calgary Wealth Management Oakville Wealth Management 525 8th Ave SW, Suite 400 123 9A St NE 1275 North Service Road, Suite 612 Calgary, AB T2P 1G1 Calgary, AB T2E 9C5 Oakville, ON L6M 3G4 403-218-3144 1-866-880-0818 289-348-5936 Edmonton Wealth Management London Wealth Management Ottawa Wealth Management 8603 104 St NW 235 North Centre Rd, Suite 302 360 Albert St, Suite 800 Edmonton, AB T6E 4G6 London, ON N5X 4E7 Ottawa, ON K1R 7X7 1-800-231-5087 519-858-2112 613-907-0700 Vancouver Wealth Management and Capital Markets Victoria Wealth Management Saskatoon Wealth Management 1055 Dunsmuir St, Suite 3424, P.O. Box 49207 730 View St, Suite 210 402-261 First Avenue North Vancouver, BC V7X 1K8 Victoria, BC V8W 3Y7 Saskatoon, SK S7K 1X2 604-647-2888 250-412-4320 306-667-2282 Andrew Semple, CFA | 416.687.6656 | [email protected] Page 6 of 6