TCNNF - Planet 13 Holdings Is A Great Cannabis Investment

2023-06-26 04:38:28 ET

Summary

• I have been following Planet 13 Holdings since it went public, and this is my fourth article on the company since December.
• The stock doesn't look cheap using projected 2023 estimates, but it is one of the best American cannabis operator stocks.
• I expect it to rally considerably this year.

I have followed Planet 13 Holdings (PLNHF) for some time now, and I have usually found it to be too expensive to own. Right now, though, I include it in both my model portfolios at 420 Investor, the Beat the Global Cannabis Stock Index and the Beat the American Cannabis Operators Index. The stock is down a little bit year-to-date, but it's down a lot from its peak early in the year as well as from its trading level two years ago. I first looked at it here in December, saying it was down but not out . I was looking for it to drop, which it did, and I bought a position for my model portfolio at year-end. Then, in March, I called it a good way to invest in the cannabis industry . My last piece, in late April, pointed to big upside and low risk . It has fallen a bit since then. In this review, I share the outlook and explain why I think the stock is such a bargain right now.

The Old Planet 13

The company initially was focused on just Nevada, where it has leading market share. The company went through a lot during the pandemic and the downturn in that market. It has two stores in Las Vegas, a Superstore and a Medizin branch. The company operates six cultivation licenses in Las Vegas and Beatty and six production licenses too, all in three locations. I like that the company has increased its sales of wholesale products to other operators and that its big store in Las Vegas had 9% of Nevada's 2022 cannabis sales. The company has a great store! I think customers will welcome its pending lounge.

Planet 13 built and opened a dispensary in California in Orange County in 2021, but this hasn't yet worked out as well as the company expected initially. It later acquired Next Green Wave, and now it has a Planet 13 Superstore dispensary in Santa Ana, four cultivation licenses, a manufacturing license and two distribution licenses. In Q1, sales in the Orange County dispensary grew from a year ago. In 2022, the company saw the revenue increase from the store as well as the NGW acquisition. I think that the company could emerge as a retail store winner in California over time.

Wisconsin Border Play

Last year, the company partnered in Illinois for a dispensary license. It ended up acquiring the full asset and announcing that it will be located in Waukegan, near the Wisconsin border, and it projects it will be open mid to late 2023. Wisconsin has no adult-use cannabis. The state, in fact, has no medical cannabis program either (CBD only).

On the last conference call , the company's management revealed a lot about this asset. CFO Dennis Logan said:

When we initially put the plan together, we were forecasting in the $10 million to $15 million in revenue annually, we think that's a very, very conservative number likely be double or triple that to the extent they'll take us to ramp up. I think we should have that store ramped up and revving on all engines sort of by April, May of 2024, assuming we get it open in early to mid Q4. So call it three to four months to get it open and stabilized and then by that point in April, I think we're getting to the EBITDA margins you're talking about and the revenue run rate north of $15 million annually.

Green Thumb Industries ( OTCQX:GTBIF ) operates a Rise store near there in Mundelein, but it's further away from the highway. On the call, management said that the GTI store is the number one dispensary in all of Illinois.

Florida Opportunity

Planet 13 bought the Harvest license in Florida when that company was acquired by Trulieve ( OTCQX:TCNNF ). There are no stores open yet or any revenue being generated, but the company will open medical dispensaries soon and begin generating revenue. The big wild-card that I think will work out very well for the company is if the state legalizes for adult-use, as it targets a Miami store if so.

Q1 Review

The company generated revenue of $24.9 million in Q1, down slightly from a year ago but in line with the analyst outlook. Gross margin fell a bit to 43.7%. The operating loss expanded from $3.7 million to $4.4 million. Adjusted EBITDA was $680K, which was better than expected.

The company stands out from its peers with respect to its balance sheet. It's not as rich in cash as it was in the past, but the company had $42.7 million at the end of the quarter, which was down from $52.4 million at year-end. Operations consumed $5.2 million during the quarter, which compared to a generation of $2.5 million a year ago. It spent $4.5 million purchasing property, plant and equipment and buying out the minority owner in Illinois.

On the call, the company pointed to potential sale leasebacks in Illinois and in California.

Analyst Outlook

There is just one firm covering the company and providing estimates now. I find this low amount of coverage to be exciting! For 2023, the analyst estimates revenue will grow 7% to $112 million, and it should grow 35% to $151 million in 2024. The adjusted EBITDA is supposed to improve from $4 million to $8 million this year, a margin of just 7%, and then to soar to $20 million next year, hitting a margin of just 13%.

Valuation

I think the estimates are very reasonable and that investors should be looking to 2024 now when trying to assess valuation. The current market cap is $130 million. The enterprise value, which takes the market cap and adds debt and subtracts cash, is a low $89 million, which is 0.6X projected 2024 revenue and just 4.4X projected adjusted EBITDA. For year-end, where I focus on 2024 projections to get a one-year ahead look, I think the valuation will be higher in six months. I shared a target in my last piece two months ago of $1.23, based upon 10X EV/projected adjusted EBITDA. I now project $1.08 (slightly higher share-count and lower net cash). This would be over 86% higher from where it closed on Friday.

I also suggest that readers look at the price to tangible book value, which is just 1.1X. This is a very low valuation relative to peers, many of which have negative tangible book value.

Chart

The stock is down 4.8% so far in 2023, which is a lot better than the 23.7% decline in the Global Cannabis Stock Index. I think that this shallow retreat is perhaps inhibiting some investors. Here is the since-inception chart, which has held its early low so far:

While the stock has held its 2018 low print, it's down over 90% from its peak in February 2021.

Conclusion

Cannabis stocks are struggling right now. The New Cannabis Ventures Global Cannabis Stock Index is currently down 23.7% in 2023 and about to complete its 9th consecutive quarterly decline. Investor sentiment is very poor.

I continue to be cautious on cannabis stocks, not expecting a sector rally yet. What will make that happen is either the elimination of 280E taxation or the ability to uplist, but I am not sure when those will happen.

If the cannabis market continues to struggle for access to capital, the stock may be impacted. Also, while I think the company will do very well in Florida, there is a risk that they don't and that they endure a loss there.

You can learn more about the company by reading its April Corporate Presentation .

For further details see: