Doug Cooper, Managing Director, Head of Research for Beacon Securities Ltd speaks to James about the four pronged approach to investing in cannabis stocks. When doing due diligence Doug suggests looking into the management team; experience translates into numbers, geographic footprint, balance sheet and valuation are other key components. During the conversation Doug discusses some LPs worth checking into.
James West: I’m joined now by Doug Cooper. He’s the head of research for Beacon Securities, a recognized and prolific investor in the cannabis space, among others. Doug, welcome.
Doug Cooper: Thank you very much.
James West: Sure. Doug, Beacon – I keep seeing your name on press releases. You’re putting a lot of money into the cannabis space. What is attracting Beacon Securities in cannabis now? Where is your focus?
Doug Cooper: Our focus, I think there’s a four-pronged focus of what we’re looking at and what attracts us. One, experience matters for management teams. I think that’s really coming to the forefront – you know, having that experience is going to translate to operational expertise, which is going to show through in the numbers, right?
Now in 2020 and 2019, it’s going to be all about the numbers; you know, who’s actually growing profitable revenue, who’s putting money on the bottom line. So that’s one of the key things that we’re looking for, seeing that foreshadowing of who has that real ability to put those numbers down.
Point number two would be, you know, what is your geographic footprint like? I know a lot of people talk about MSOs, but in my view, all states are not created equal. Just imagine you had a regular consumer packaged product; what states would you want to be in? Those are the states that I think you want to focus on.
Third would be the balance sheet. Balance sheets are incredibly important now: who has that funded capacity in place? You know, do you need to go back and raise more money? These are the kind of questions…we obviously like those companies that have strong balance sheets, and we get back to the first point – those that are companies that are generating free cash flow to fund internally their ability to grow.
And the last is valuation. Valuation matters, it really puts the risk return in your favour.
So those are the key probably themes that we’re looking at right now.
James West: Sure. And so for your clients, investors who are looking to deploy capital, is the bloom off the rose, as it were, for the idea of the early-stage speculative play that’s going to increase in value by 10x from going public to trading? Are those days now in the rearview mirror?
Doug Cooper: You can’t always discount the potential of a, you know, maybe a brand guy in the US coming out and, you know, stealing a lot of the thunder and doing really well, but we think, you know, the more speculative stuff is probably gone. You have a bunch of established players, and you know, we get back to balance sheet and operational expertise. You know, are those younger companies fully funded? A lot of times, they’re not fully funded, so we think the more established players are going to be the ones we should look to.
James West: And is the availability of capital still as boundless as it was in the last couple of years, or is there starting to be a more judicious deployment?
Doug Cooper: I think you hit the nail on the head, there. I think people are more cautious about – they want to back winners, at the end of the day. They don’t want to back speculative nature. People want to back winners, and again, that proven management team will be able to attract those investment dollars, because they’ve done it before and their operations are starting to prove out that they can do it again.
James West: Sure. To what extent do you see, from your position in the universe, to what extent do you see the cost per unit of input affecting the success and viability of the business plans of even the well-funded, well-balance-sheet, well-managed companies? I mean, if you’re a Canadian operator who’s got, you know, a baseline regulatory compliance load in terms of your costs per gram relative to, say, a Colombian company that’s got, you know, a lesser burden of compliance financially, do you think that the Colombians have an advantage, then, because they can produce cannabis at $0.10 a gram as opposed to $0.60 a gram in Canada?
Doug Cooper: So here’s maybe where I’m a little bit diametrically opposed to people; I just don’t believe that Canada or the US will allow the importation of cannabis, period. Like, we’re seeing everywhere. You know, the governments are going out on a limb to establish a regulatory industry and a real industry in their home countries; they want the tax dollars. At the end of the day, you start allowing, you know, foreign imports of the cannabis, the jobs are going to disappear and you’re not going to get the tax dollars that they think.
So I don’t think that’s a major threat to the industry, maybe for several years.
James West: Sure. Deloitte came out with a report suggesting that edibles market is going to be worth billions of dollars within a few years. Do you see that unfolding?
Doug Cooper: I think that’s a real possibility, for sure.
James West: Right. Okay, so what kind of – what companies specifically are you interested in? What’s Beacon really supporting?
Doug Cooper: I think for the, you know, getting back to those themes that we mentioned off the top, I think there’s four companies that really, you know, fit those criteria for myself. One would be in Canada and the other three would be in the United States. So the one in Canada, quickly, would be Village Farms. They own 50 percent joint venture called Pure Sun Farms here in Canada, Delta BC. They have, potentially, the largest footprint in Canada, at close to 5 million square feet. They are already proving that they’re – the 30-year agriculture experience of the management brings is resulting in profitable operations, and they did a 60 percent EBITDA margin in the first quarter; that’s the best in Canada that we’ve seen.
Again, so we think they’re going to be vertically integrated, that they’re going to eventually brand their own products and sell directly to the provinces, and based on our EBITDA assumptions for 2021, when they have full legalization and full capacity utilization of what they call D2 and D3, the stock is trading about 5 times EBITDA, and then you get their whole CBD business in the United States for free, which they own 100 percent of. And they’re, call it a multi-state operator for their CBD business; they’re in North and South Carolina, Virginia, Colorado, and now Texas; they have 6 million square feet in Texas which, as you know, just passed the House there to legalize hemp/CBD; the Governor is going to sign off it in a couple of weeks. And that opens – we think they’re incredibly well-positioned, and investors aren’t paying attention to the story at all.
James West: Right, well, that’s intriguing.
Doug Cooper: The other ones are in the US, and one is topical. Planet 13 reported their May sales were up 8 percent, or call it same-store sales growth of 8 percent since April. They’re the largest retailer in the world; their revenue run rate right now is 70 million. The numbers they talk are just unbelievable, really. They had 3,500 people come through the turnstiles in May; that’s an annualized 1.3 million people going to their superstore. So this company has a 55 percent gross margin their last reported quarter, an 11 percent EBITDA margin. We think it’s only going to expand from there. They have a 10 percent market share in Nevada. We can think of no other company in a rec legal state that has that market share that they have. They have 20 million in cash, and they’re generating free cash flow. So this, to me, is an ideal situation where companies are looking to expand their footprint; Las Vegas in particular is a great place to launch national brands.
James West: Sure. And they’ve got that deal with Mike Tyson, too.
Doug Cooper: They got the deal with Mike Tyson. So we think this is a great opportunity, not only just on its own merits, but we think the strategic position in a company is just ideal for somebody to come in and acquire them, and it trades about 6 times EBITDA, by our estimates.
The other one I want to mention is Cannex Capital. They’re in number one position in Washington State; they have about a 30 percent operating margin in Washington, and this is, you know, after five years’ head start, this gets back to our ‘experience matters’ again. Five year head start from everybody, because Washington State itself was early on the recreational legal side of the equation, but a lot of people didn’t care about Washington, because it’s kind of a more mature state. But the operational expertise that you need to generate those kind of margins in a hyper-competitive market, translates to other markets.
So they’re merging with a company called Forefront, who brings licenses in a number of states, including Massachusetts, Illinois, in particular, and are moving into Arizona and then, potentially, Michigan and California – five states we think are very attractive, because they’re rec-legal and they’re large. And if these guys can bring their grow and production expertise, the yields they can generate are quite attractive. And again, when Massachusetts and Illinois, in particular, get up to full ramp on the rec side, and we know that Illinois just got approved on the recreational side earlier this week, then we think it’s ramped. The stock’s trading at about 4 or 5 times EBITDA from the ramp perspective.
And the last one is a company called Indus. Indus is California-based; again, you know, we think California is particularly attractive. If you think about the actual revenue, it’s the number one cannabis state in the world, and it’s just getting started. 2.5 billion was their revenue last year; the revenue per capita there is about $75 a head, where somebody like Colorado is 250. So ultimately, we think this is going to a $10 billion or $12 billion market; Indus is building a portfolio of brands. They have reach into 84 percent of the dispensaries there. They have the capacity in terms of extraction, all the production, and the grow, where without a lot of money spent on infrastructure, they can generate well north of $200 million in revenue.
And you know, we think it’s a twofold strategy. One is, you’re going to sell into a growing number of dispensaries in California – there’s 600 day, it’s probably going to 1,500 to 2,000, and also sell more product to each of those dispensaries. So we think they’re incredibly well positioned. They have 30 million in cash, and great growth opportunities in front of them, here.
Those are our four that we’re really focused on.
James West: Wow. Three of the four I know, and have been guests on the show; Indus is going to be a guest on the show soon enough.
Doug Cooper: Perfect.
James West: So, great to hear about those. Doug, we’re going to leave it there for now, but we’re definitely going to have you back because that was great insight, and thank you very much for joining us today.
Doug Cooper: Great, look forward to it.
James West: You bet.
Doug Cooper: Thanks.
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