At present, opportunities for outsized returns in Canada’s cannabis market are hard to find, given oversaturation, margin compression and steeply falling share prices regardless of market cap. That said, a significant source of untapped value remains latent in the space.
The first component of this value stems from how widespread underperformance among cannabis companies – the Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ) is down by over 80 per cent since 2018 – has cut overpriced assets down to intrinsic value, while also dragging quality assets below intrinsic value, creating an abundance of attractive buying opportunities.
The second component concerns how this value is amplified with private cannabis companies, which trade at lower multiples than their public counterparts for two reasons:
- Their illiquidity and generally smaller size, leading to limited access to capital and talent to foster future growth
- The private market’s less stringent regulatory oversight, which can obscure a company’s potential value from prospective investors, causing it to be priced at a discount
With the median EV/revenue multiple for public cannabis companies at 1.4x in Q4 2022, nearly 75 per cent below pre-pandemic levels, and EV/EBITDA multiples expected to grow tenfold by 2028, there is a window for acquirers to develop discounted private cannabis holdings, take them public, and reward shareholders and exiting entrepreneurs with higher valuations.
An established cannabis retailer tailormade for M&A
A little-known cannabis penny stock, Shiny Health & Wellness (TSXV:SNYB), market cap C$900,000, is well ahead on capitalizing on industry pessimism by expanding its 26-store ShinyBud retail network across Ontario.
While the average cannabis retailer is facing stiff competition because of oversupply, black market persistence, and the consumer’s shift away from smoking, Shiny Health has risen above the herd by catering to areas less saturated with cannabis retailers, emphasizing:
- A capital-light licensee model, which supports members through location scouting and design, leasing negotiation, onboarding, regulatory oversight, marketing and strong relationships with reputable licensed cannabis producers
- A reputation for a welcoming customer environment focused on education and wellness, where highly trained budtenders pair award-winning, community-centric products to each customer’s specific needs and experience level
This formula produced C$29.6 million in revenue and C$10.9 million in gross profit in Fiscal 2023, both up by 43 per cent YoY, including adjusted EBITDA of C$2.4 million and a gross margin of 37 per cent.
While Fiscal 2023 revenue was driven by the sector’s falling multiples and a quadrupling of the store portfolio going back 18 months, Fiscal 2024 has seen management be quick on its feet, fortifying Shiny Health’s balance sheet in anticipation of a rebound in cannabis multiples.
Its most strategic move involved reducing the store count from 31 to 26 to eliminate underperforming locations, those too large for community needs, and those with unusually high rent because of high inflation, with funds allocated to debt repayment to keep it in line with company assets at a competitive 1:1 ratio.
Management’s pivot resulted in a net loss of C$2.8 million over the first two quarters of Fiscal 2024 on C$12.6 million in revenue, gross profits of C$4.5 million, and a gross profit margin of 36 per cent. It’s the operational efficiencies underlying this high gross profit margin – which the company has maintained since inception in February 2022 – that set it apart from its peers as the steadiest of ships at a time when the retail price of cannabis has fallen by 30 per cent since 2018.
“What we’ve achieved in year two is what most cannabis retailers achieve in year five,” Meris Kott, Shiny Health’s CEO, said in a recent interview with Stockhouse. “In spite of our net loss in Q2 2024, we’re honing in on being more profitable.”
Contrary to appearances, Shiny Health management’s intelligent capital allocation decisions have freed up the company balance sheet to add attractively priced private cannabis retail locations to its network.
A sound acquisition strategy
Instead of growing by acquiring cannabis assets under creditor protection, as has been the norm across Canadian legalization’s short history, Shiny Health has its sights set on established stores with the tell-tale signs of long-term success, including a competitive position in their neighbourhoods and cash generation with room for enhancement.
“We don’t expect to develop brand new greenfield locations,” Kott said, “because the opportunities to acquire established, revenue-producing stores is abundant and the risk and cost factors much less for the company.”
This approach not only saves on the capital required to build new stores, it also allows for more efficient capital allocation among the existing store network, not to mention the onboarding of third-party brands to strengthen and diversify the Shiny Health umbrella.
With due diligence ongoing for numerous prospective and undervalued targets, the cannabis penny stock has positioned itself to offer store owners keen on exiting a consolidating industry a deal it would be irrational to refuse. We can divide this deal into six value propositions:
1. A strong cultural foundation
On a qualitative level, Shiny Health’s customer-centric culture speaks for itself in terms of ensuring continued exceptional service in any given seller’s community.
2. Scale with minimal competition
On a quantitative level, Shiny Health’s scale affords it negotiating power at the acquisition table, greater access to capital in the public markets, and expertise with establishing leadership positions in underserved markets, all of which make a strong case for building upon the legacies of exiting entrepreneurs long into the future.
Shiny Health’s scale also allows it to pursue single stores or small retail chains that wouldn’t move the needle for major cannabis players, meaning the company may be the only buyer for its chosen targets. A recent success story saw the company acquire 10 Stash and Co. cannabis retail stores in Ontario with a combined C$10 million in forecasted 2023 revenue for only C$1 million in cash and shares.
3. Tangible financial upside
Even if Shiny Health does encounter competition for its deal flow, the personalized attention it can provide owners with because of its relatively small size, in conjunction with its offers’ tangible financial upside, put it in a league of its own.
The company provides exiting cannabis retailers with a strategic combination of cash and equity, granting them the attractive incentives of:
- Instant liquidity
- The private-to-public valuation bump as SNYB shareholders after onboarding successful acquisitions
- Long-term share price appreciation as the cannabis penny stock reaches a critical mass in Ontario, expands across Canada and internationally, and proves its C$900,000 market cap – with only 14.1 million shares outstanding – to be severely undervalued, a thesis we’ll discuss at the end of this article
Instead of cutting ties with their life’s work, a seller can keep skin in the game through SNYB shares, while Shiny Health management, backed by an impressive corporate pedigree, identifies the shortest line between the available acquisitions universe and outsized returns.
4. Disciplined allocators with brand-building expertise
Creating value from cannabis consolidation requires a management team focused on business efficiency and well-versed in building brands, both of which Shiny Health ticks the box on.
Kott is a corporate and global business consultant with over 35 years of experience, most recently highlighted by her role as CEO of Xtacy Therapeutics (CSE:XTCY), a prospect generator in the consumer wellness space with a focus on psychedelics, mycology, hemp and CBD.
Chairman Brad Kipp sharpens Kott’s leadership background with almost three decades of experience as chief financial officer (CFO) for private and public companies, including companies listed on the Toronto, New York and London AIM stock exchanges. He currently serves as Director and Audit Committee Chair of Americas Gold and Silver (TSX:USA) and Haventree Bank, a Canadian Schedule 1 Bank.
The cannabis penny stock’s executive team is rounded off by seasoned professionals ready to wait for and make crisp contact with any fat pitches that cruise its way, including:
- CFO Dominic Lavallée, who brings over 10 years of experience in retail and quick service restaurant finance and accounting
- Director Lyn Christensen, who founded two successful start-ups, built an additional two alongside Elon Musk, and has advised many of the world’s top technology founders and their family offices for over 20 years
- Director Jonathan Hemi, who brings a proven 28-year track record of operating small and medium-sized businesses and building their brands to a global scale. He is currently Managing Partner at Globefill, the makers of Crystal Head Vodka; Founder and owner of Signal Hill Spirits; and owner of several other businesses
With over a century of business building between them, it is no surprise that Shiny Health’s leaders did not flinch in the face of tough cost-cutting decisions to ensure continued strength, resulting in positive adjusted EBITDA through Fiscal 2023 and a gross profit margin to date consistently above a third of sales.
While less efficient competitors are floundering, Shiny Health’s well-oiled operation has allowed it to raise capital for inventory in a difficult market and focus on the long-term resiliency of cash generation.
5. Diversified revenue streams
The cannabis penny stock has instituted three ancillary businesses to its core retail sales, each of which lessens share-price volatility, requires little to no capital expenditures and diversifies potential growth across Canada’s nascent cannabis industry. They include:
- The ShinyBuddy data program, which provides data analytics on store sales trends to a growing number of licensed cannabis producers and brands. The program took in C$1.6 million in revenue during Fiscal 2023 and boasts over 43,000 customer accounts and counting
- Private-label partnerships, with two licensed producers in Quebec contracted to produce Shiny Health-branded hash and THC flower
- Trademark license agreements, most recently with Turbo Holdings, with 17 agreements in operating stores as of Nov. 14, 2023, and three more in stores expected to begin operations in the near future
Backed by an established brand name that other brands want to be associated with, as well as loyal customers at the point of data monetization, Shiny Health represents a high-potential retail expansion opportunity for investors experienced enough to see through temporary losses toward the shareholder value to come. As if this weren’t enough, the company recently expanded its focus to include an active strategy in line with what it sees as 1) the next evolution in the retail cannabis space, and 2) a key differentiator from pure-play competitors.
6. Positioning for the future of Canadian cannabis growth
While Shiny Health remains focused on value-added licensing opportunities to unlock a greater share of the C$2.8 billion Ontario cannabis market, its executive team has identified a Canada-wide growth vector, supported by macro tailwinds, to cement the company’s leadership in cannabis wellness over the long term.
According to data from Deloitte, up to 70 per cent of Canadian cannabis enthusiasts use it as a health and wellness solution, with a separate Harris poll showing relaxation (52%), sleep (49%), stress (44%), anxiety (41%) and medical symptom relief (33%) as the most common uses.
This consumer trend aligns with the widening availability of cannabis products under government and employer health plans, expected growth in the Ontario cannabis market from greater municipal participation and a reduction in illicit operators, and ongoing governmental studies trending toward regulated over-the-counter (OTC) sales of cannabis health products.
Although Canadian pharmacies cannot currently sell cannabis flower or derivative OTC products that make a health claim, the vast majority of consumers are voting with their wallets in favour of cannabis for relief over recreation. This has opened a door for companies to capitalize on synergies between cannabis and the pharmacy space to establish enduring health and wellness retail brands.
Shiny Health is also well ahead on this opportunity, having closed its first acquisition – the cannabis-friendly Cotton Mill Pharmacy in Cornwall, Ontario – in October 2022 for C$835,000, or only 4.6x EBITDA, including C$600,000 in financing from Care Lending Group at a competitive rate of 7.75 per cent over 10 years.
Shiny Health intends to patiently wait for Health Canada to approve cannabidiol and cannabis products, while it gathers learnings from Cotton Mill, adds pharmacy acquisitions on a strategic basis, and moves a step ahead of competitors looking to profit from the symbiosis between cannabis and pharmacies.
Potential innovations to be pioneered through this symbiosis include:
- A pharmaceutical advice network, which is being workshopped through the ShinyCare virtual pharmacist cannabis consultation pilot program
- Dedicated cannabis stores within pharmacies and/or pharmacies within cannabis stores to more efficiently meet customer needs
- Providing medical cannabis prescriptions supported by recent Ontario legislation that allows pharmacists to write prescriptions for certain minor ailments
As Health Canada slowly regulates a cannabis medical products market into existence, Shiny Health will continue to add undervalued cannabis retail stores in Ontario, followed by other provinces, the United States and Europe, until management determines the company to have reached a critical mass in each geography, true to its risk and cost-conscious track record of running stores and onboarding new licensees.
A bargain price for exponential growth
The tendency of stocks to experience short-term inefficiencies between investor sentiment and business value has hit Shiny Health with a vengeance, pummeling shares with an over 98 per cent loss since inception.
The reasons behind the fall include lack of market awareness, given the cannabis penny stock’s size and short trading history, and a general shift away from small- and micro-cap stocks to cash and bonds given persistent inflation and the highest interest rates since the Great Financial Crisis.
While a flight to safety is part and parcel for the average investor, Shiny Health’s fall is, of course, extremely exaggerated, given the rationality of its cannabis retail expansion thesis and the caliber of the team in charge of making it a reality.
“We are confident in our ability to grow organically into a formidable player in Ontario’s cannabis and pharmacy markets,” Kott said. “We will achieve this by building the right stores, in the right locations, for the right economics, each of them effective units to fortify our bottom line.”
“What cannabis consumers and shareholders need to know is that, when you look at growth forecasts for cannabis and wellness, these markets have only just begun to take off,” she added, “and Shiny Health is well-positioned to capitalize on them.”
Currently trading at only 0.04x sales, readers are being offered a stake in Shiny Health practically for free. This makes the cannabis penny stock a truly unique holding for investors who can recognize the evidence for conviction, withstand the volatility of a budding growth story, and watch as the cannabis and pharmacy industries converge and catalyze the company’s prescient strategy.
The time for due diligence is now.
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