johnale wrote: B of A last analyst report - (lowest rating on supreme - but gives a good idea as to why we are facing so much pressure)
We are lowering our rating on Supreme (YFIRE) to Underperform from Buy with our PO
to C$1.25 from C$2.50 on a cut in our target multiple to 2x CY20e sales (was 4x) and no
revision to our estimates which we recently revised at earnings. While we view Supreme
as one of the top operators in Canadian cannabis, as evidenced by recent results, we
think this is outweighed by risks in the near-term as (1) provincial retailers have slowed
purchasing as they right-size inventory levels and get ready for new product forms
ahead of rec 2.0, a dynamic we expect to impact the entire sector, with YFIRE also
indicating its own growth would likely flatten in 2H; (2) due to a later start vs some
peers, YFIRE is still investing into its infrastructure to be ready for 2.0, and also to help
it transition from a wholesaler to selling only into retail, a split which is currently 70/30;
(3) to fund investment, management indicated it intends to raise additional debt capital,
adding leverage to the balance sheet assuming that a capital raise occurs in the
currently tough market backdrop; (4) while some ways out, Supreme also has C$100mn
convertible debenture due Oct 2021 at a strike of C$2.45/shr and we do not expect
Supreme to be FCF positive until Sep qtr 2021.
Retail right sizing inventory levels ahead of new product forms
Our checks suggest that provincial retailers have slowed purchasing as they right-size
inventory levels and get ready for new product forms ahead of the mid-December
legalization of rec 2.0, with YFIRE indicating growth will likely flatten in 2H of this year.
We covered this concept in detail in Growth to pause in 2H as channel sells its supply,
before a 2020 rebound on rec 2.0.
• In mid-August, Canopy Growth management noted that while the category is
growing, with a number of inventory days in the channel, province distribution
centers readying for 2.0 CY19-end, and province return policies very liberal,
management CGC felt it prudent to take a reserve for gel caps returns.
• Also in mid-August, Tilray noted that adult use channel revenue would slow in 2H
of CY 2019.
• In mid-September Aurora management anticipated “that quarter to quarter sales
volumes and revenues may be volatile” and “the Canadian consumer channel
continues to experience challenges at the retail level in key markets and resolution
of this issue is beyond the Company’s control” i.e. retail store sales.
2x sales seems low.. seeing the 300mil val currently trading at.....
once we get that tier 1 financing and improve balance sheet - maybe well justify a re-rating- and share price will move up.