Ianthus Capital Holdings Inc C.IAN

Yep still my fave MJ stock in use $10 target

[justasmuck]

Q2/19 review: A steady quarter as Florida retail openings continue to progress

iAnthus reported Q2/19 financial results that were generally in line with our expectations. For the period, pro forma revenue came in at US$25.0M, a 35% increase QoQ and just a bit shy of our forecast of US$26.3M. Management indicated that top- line growth in the period was largely attributable to: (1) an additional two dispensaries opened in Florida (Dayton and Orlando); (2) increased wholesale penetration in Massachusetts (selling to 40% more retail locations QoQ); (3) solid same-store growth in Maryland and increased state-wide breadth (with IAN products now available in ~73% of MD’s dispensaries); and (4) 50% top-line growth in Nevada. Further, its recently acquired CBD for Life business is now operating at a revenue run-rate of ~US$5M.

Below the top line, iAnthus reported Q2 results that were ahead of our forecasts. The company’s adj. gross margin saw significant improvement, coming in at 52.4% (up from 23.4% in Q1) and ahead of our expectation of ~35% for the period. Improved margins resulted from increased utilization in several of iAnthus' markets as it continues to ramp up its production capacity. In addition, cash opex (excl. professional and acquisition related expenses) of US$13.8M was up only a modest US$3.6M from Q1. As a result, the company reported an adj. EBITDA loss of (US$4.7M) in Q2, a modest improvement over the prior quarter but a beat to our forecast of (US$8.4M).

Investment Highlights

• Building a national US presence. With Q2 representing the company’s first full quarter with MPX fully integrated, iAnthus now has exposure to 11 states, including a total of 26 retail locations that are up and running (spanning eight different markets) with licenses in hand that allow for additional 42 locations. We believe the back half of 2019 will see increased penetration into Florida (with nine more locations slated to open between now and Jan 2020), Massachusetts (where the company hopes to have its first recreational dispensary in operation by Q4) and New York.

• IAN continues to trade at a significant discount to MSO peers. IAN currently trades at 4.1x our 2020 EV/EBITDA, a significant discount to its MSO peers at 8.4x. Given the company’s continued expansion throughout the US and exposure to many markets with attractive growth profiles (MA, FL), we believe IAN continues to be one of the best buys on relative valuation in the space today.

• Updates to our estimates. Although Q2 was largely in line with our estimates, we have pushed out the MA and FL opportunities in our model. iAnthus does not anticipate its first adult-use store in MA until Q4 and a bulk of its FL retail openings are expected to be closer to the end of the year. Although we have not made any substantial changes to our longer-term forecasts or terminal valuation, our 2019 estimates have come down substantially, with revenue now as US$144M (from US$228M) and Adj. EBITDA of (US$4M) (from US$55M).

Valuation: We value iAnthus’ assets using a SOTP analysis with discount rates ranging from 10% to 15%. After updating our model as described above, we are trimming our target price to C$10.00 (from C$11.00). This still represents a ~211% forecast return from current levels, and we maintain our SPECULATIVE BUY rating.

Revenue (US$M)

4

Previous -

SG&A (US$M) 28.0

EBITDA Adj (US$M)

(17.9)

Previous -

EPS (US$) (0.25)

Previous -

10 9 8 7 6 5 4 3

Source: FactSet

Priced intraday 27 August 2019

iAnthus Capital Holdings Inc. is a provider of financing and management services to the growing US cannabis industry, which currently has limited access to
capital due to the restrictive nature of the US federal government. To date, the company has already deployed >C$100 million of pro forma capital into a number of strategic investments that are estimated to drive strong growth.

IAN
Horizons Marijuana Life Sciences Index ETF (rebased)

Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX)
The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and all the companies and securities that are the subject of this report discussed herein.

For important information, please see the Important Disclosures beginning on page 6 of this document.

Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19

Q2/19 review

iAnthus reported Q2/19 financial results that were generally in line with our expectations. For the period, pro forma revenue came in at US$25.0M, a 35% increase QoQ and just a bit shy of our forecast of US$26.3M. Management indicated that top-line growth in the period was largely attributable to: (1) an additional two dispensaries opened in Florida (Dayton and Orlando); (2) increased wholesale penetration in Massachusetts (selling to 40% more retail locations QoQ); (3) solid same-store growth in Maryland and increased state-wide breadth (with IAN productsnow available in ~73% of MD’s dispensaries); and (4) 50% top-line growth in Nevada. Further, its recently acquired CBD for Life business is now operating at a revenue run- rate of ~US$5M. In what was MPXs first full quarter of contribution, we note that iAnthus saw healthy contribution from both its operating regions, with 53% of revenues coming from the eastern region and the residual from western states (excl. pro forma adjustments).

Figure 1: Actual vs. estimated Q2/19 results

iAnthus Capital Holdings, Inc.Lowering Target Price

(US$'000s) Q2/18A		Q1/19A Q2/19E Q2/19E 2019E
Reported Revenue Pro-Forma Revenue Cost of Goods Sold	$ 1,534 9,620 18,544 122 9,080		19,200 25,016 10,003	16,600 26,325 10,790	nmf 144,004 64,283
Adj. Gross Margin Operating Expenses Salaries, General & Administrative Share-based payments Income (loss) from operations	134 7,229 2,250 $ (8,436) 540 18,883 1,646 $ (17,607)		9,197 19,748 9,586 $ (23,804)	5,810 14,212 750 $ (10,338)	79,721 88,483 12,732 $ (22,779)
Adjusted EBITDA	$ (7,095) $ (5,135)		$ (4,703)	$ (8,403)	$ (4,446)
Interest Income Finance & Other Costs Other Costs	192 1,287 1,872 - 3,861 (3,203)		- 8,076 (22,590)	- 400 -	- 12,737 (25,793)
Income Taxes	--		-	3,674	12,858
Comprehensive Net Income	$(35,469) $ (18,265)		$ (9,290)	$ (14,412)	$ (22,581)
EPS -FD	$ (0.61) $ (0.15)		$ (0.06)	$ (0.06)	$ (0.09)

Source: Company Reports, Canaccord Genuity estimates

Below the top line, iAnthus reported Q2 results that were ahead of our forecasts. As a result of productivity improvements and increased utilization in several states (AZ, FL, MA, MD and NV), the company saw its gross margin more than double from the prior quarter from 23.4% to 52.4% (and ahead of our estimates of 35%). iAnthus also increased production by 30% sequentially to 2,404kg.

Further, management remained disciplined on its operating spend, with cash opex (excl. professional and acquisition related expenses) of US$13.8M only up a modest US$3.6M from Q1. As a result, the company reported an adj. EBITDA loss of (US$4.7M) in Q2, a modest improvement over the prior quarter but a beat to our forecast of (US$8.4M).

Operational updates

 CBD for Life. In June 2019, the company closed the acquisition of the CBD company, which currently has its products distributed in more than 1,100 retail locations in 46 states. This transaction places IAN in a group of only five other MSOs that have started to implement a national CBD strategy.

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Speculative Buy unchanged Target Price C$10.00 from C$11.00 | 27 August 2019

Cannabis 2

Speculative Buy unchanged Target Price C$10.00 from C$11.00 | 27 August 2019

Cannabis 3

Finally, its Fall River cultivation facility is expected to open during the fourth quarter, which will more than double capacity in the state. iAnthus currently has one medical marijuana dispensary in Boston up-and-running.

iAnthus Capital Holdings, Inc.Lowering Target Price

•  Florida. During Q2/19, the company remained focused on growing its presence in Florida as it increased its store count from 3 to 5 dispensaries (the only state that IAN had new store openings during Q2/19). In addition to two stores openings during the quarter (Dayton and Orlando), iAnthus opened an additional 3 dispensaries subsequent to the quarter, which has helped them accumulate ~4% market share to date in Florida. By the end of January 2020, IAN expects to have 17 dispensaries opened in the state.

•  Massachusetts. iAnthus announced that it received municipal approval for an adult-use dispensary in the second most populated city in the state, Worcester, MA (link). Worcester has a metropolitan area population of ~925k and IAN expects the store to be operating Q4/19, pending final approval from the Massachusetts Cannabis Control Commission. Given the slower-than-

anticipated license approval process, IAN will be one of the first entities with an adult-use dispensary in the area and should see significant contributions from this location. On the wholesale side of operations, the company increased its sale exposure from 15 to 21 stores during the quarter.

•  New York State. iAnthus signed a lease and is currently building-out its third dispensary which is expected to come online in the fourth quarter. The dispensary will be the only storefront serving the Staten Island population of 500,000 residents. The company also announced that it met milestones to open the flagship ‘Be.’ retail outlet in Brooklyn. iAnthus is also licensed to open one more dispensary in the state (Tompkins County).

•  Maryland. iAnthus saw positive continued performance in the state with growth across all three dispensaries and penetration into the wholesale market increasing to 73% (up from 56% in Q1/19).

•  New Jersey. The company is currently in the process of Phase I development for the Pleasantville facility which will bring ~33k sq.ft. in cultivation and processing capacity.

•  Arizona. Milestones were achieved which will allow for the sale of three new product categories in Q3/19 including gummies, live resin and sauce cartridges. Yield gains in cultivation of 13% were also achieved.

 Nevada. The company saw revenue and customer growth of 50% and 40%, respectively. Furthermore, product milestones were met to support the release of gummies, live resin and sauce cartridges.

Trimming our target to C$10.00 (from C$11.00); lowering our near-term estimates

Although Q2 was largely in line with our estimates, we have pushed out the MA and FL opportunities in our model. iAnthus does not anticipate its first adult-use store in MA until Q4 and a bulk of its remaining FL retail openings are expected to be closer to the end of the year. Although we have not made any substantial changes to our longer- term forecasts or terminal valuation, our 2019 estimates have come down substantially (as illustrated below). As a result, our valuation has been modestly

lowered to C$10.00 (from C$11.00) but we are maintaining on SPECLATIVE BUY rating and overall long-term bullish view for IAN.

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