Benzinga - by Nicolás Jose Rodriguez, Benzinga Staff Writer.
Zuanic & Associates (Z&A), an equity research firm has initiated coverage of TILT Holdings (OTC: TLLTF), a micro-cap stock with a $12 million market cap, with an Overweight rating.
TILT’s EBITDA Potential Senior Z&A analyst Pablo Zuanic highlighted the underappreciated value of the vape hardware franchise (Jupiter Research unit) and potential synergies between TILT's plant-touching and vape divisions. Additionally, a recent balance sheet restructuring contributed to increased investor confidence.
While positive U.S. federal reform could re-rate the entire sector, TILT offers both mispricing compared to peers and the potential for above-average EBITDA/share growth.
Zuanic noted TILT's stock valuation discount, at 0.4x 1-year forward EV/Sales, stands in contrast to the peer group's 1.2x average.
Cannabis Business Strategy According to Z&A TILT's cannabis business is gaining momentum in Massachusetts, Ohio and Pennsylvania. Half of cannabis sales come from company-owned brands, with the rest from "partner brands."
The company's asset-light strategy aims to build a robust brand portfolio.
TILT leverages its sister unit, Jupiter Research, which distributes vape hardware in 39 states. This strategic move fosters relationships with brands and cannabis companies, creating potential brand partnership opportunities for TILT.
Jupiter Research is the largest CCELL distributor of vape hardware in the US. With annualized sales of around $120 million, Jupiter holds a mid/high teens share of the US cannabis vape hardware market.
“Jupiter sells inhalation hardware in 39 states and 15 countries; in total, it has supplied more than 1,000 brands across the world (the products are used in CBD, medical, and recreational cannabis),” Zuanic wrote. “Jupiter supplies over 15 major public and private MSOs (key customers include MSOs such as Curaleaf (OTC: CURLF), Verano (OTC: VRNOF), and TerrAscend (OTC: TSNDF), and several large LPs in Canada.”
Financial Stability Zuanic says TILT is well-placed to meet its debt maturities until the end of 2025. Debt restructuring and a sale-leaseback transaction with IIPR have improved the company's financial position.
“By 2Q23, TILT's net financial debt stood at $53 million, a mere 0.3x of sales, one of the lowest among the 20 MSOs tracked. While concerns had arisen due to cash burn totaling $18 million from negative free cash flow in 2021 and 2022, coupled with debt maturities and the high cost of debt (net interest expense accounting for 13% of sales in 2Q23), TILT restructured its debt, reducing non-revolving debt by $46 million from its December 2021 level of $87 million,” Zuanic explained.“From our perspective, the company is well-positioned to meet its debt maturities, at least until the end of 2025. Of the total debt of $65 million, $7 million is set to mature in 2H23, followed by $15 million in 2024, $5 million in 2025, $28 million in 2026, and $9 million in 2027.”
Sales and Profitability The cannabis business outgrew its respective markets with an 11% sales growth in 1H23.
TILT's profitability benefits from the faster growth of the cannabis unit, leading to an improved margin mix. Cost-cutting measures further support EBITDA trends.
“TILT’s cultivation assets provide access to biomass in supply-constrained markets, and contract manufacturing and its distribution network provide those brands with efficient access to markets like MA, OH, and PA, according to management,” Zuanic said.
“The company’s robust inhalation supply chain reduces the risk of stock-outs and failed products and its innovative custom hardware and packaging solutions allow differentiation of products.”
Cannabis Plant Touching Business: Highlights Of Pennsylvania Operations TILT operates a 34,000 sq ft cultivation facility in Pennsylvania, with 90% wholesale penetration across the state's dispensaries.
Pennsylvania's cannabis market, with its growing patient base, holds significant potential as neighboring states consider recreational legalization.
With a sizable patient base, PA's medical cannabis market is on an annualized sales trend of $1.5 billion, with potential for rapid growth if recreational legalization occurs.
The market faces price deflation, increased competition, and slow store count growth.
Bull Case vs. Bear Case Thesis Price targets and valuation multiples are subject to sector volatility and US federal reform news. However, TILT's earnings growth and a reduction in the peer discount could lead to positive results for investors.
“This is a consumer and wellness industry with the potential to expand significantly, potentially 3-7 times its current domestic size by 2030. Apart from tailwinds, TILT's path to success hinges on earnings growth and reducing the peer discount. While we refrain from specifying price targets, our projections suggest that using a more conservative 1x sales multiple, the stock could potentially exceed US$0.30, a notable increase from the current stock valuation of US$0.03,” Zuanic said.
The bear case considers potential challenges in Jupiter's margin and market share, missed synergy opportunities and economic challenges in TILT's three states of operation.
“In contrast, the bear case primarily concerns potential margin compression, lack of cash flow improvement, further market share loss, TILT's inability to capture synergy opportunities, and challenges in the cannabis business's expansion within its territory, particularly if Ohio and Pennsylvania do not legalize recreational use, leading to oversupply in Massachusetts,” concluded the analyst.
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