The Flowr Corp still has big upside, says ATB Capital

ATB Capital Markets analyst David Kideckel likes the new deal from The Flowr Corporation (The Flowr Corporation Stock Quote, Chart, News TSXV:FLWR) which just announced a new strategic acquisition.

In an update to clients on Tuesday, Kideckel kept his “Speculative Buy” rating but dropped his one-year target from $1.40 to $0.75, reflecting share dilution.

Toronto-based cannabis company Flowr currently has operations in Canada, Europe and Australia, while its Kelowna, BC, facility has both indoor and outdoor grow and R&D, producing rec and medicinal cannabis products. The company announced on Tuesday a definitive agreement to acquire Terrace Global in an all-share deal valued at $63 million.

Flowr said owning Terrace, a Canadian-based international cannabis business, will give it better operating efficiencies with its existing joint venture partnership in Europe via Holigen, along with cost synergies of about $2 million from joining the two companies.

The deal is also expected to bring more than $31 million in cash and marketable securities to Flowr’s balance sheet and help reduce Flowr’s debt by at least $11.9 million and up to approximately $21.6 million as a result of early conversion of debentures.

“Together, we believe that we have a more robust financial profile which will give us sufficient access to liquidity to pursue our strategic objectives in Canada and internationally.” said Vinay Tolia, Flowr’s CEO, in a press release. “The team at Terrace has a great deal of success in the Cannabis industry and we are very pleased to have them join the Flowr family in our mission to create one of the preeminent players in the industry for years to come.”

Looking at the deal, Kideckel said while there’s a lack of visibility over the value of Terrace’s assets in Uruguay and Spain, Flowr has issued equity at a reduced cost of capital and risk, so it’s a net positive for Flowr. Kideckel also observed that Terrace’s management team is experienced and includes executives with experience developing international cannabis assets in countries such as Uruguay, Germany and Israel, with the additions (Terrace is expected to add three members to Flowr’s board of directors) likely to strengthen Flowr’s international corporate development capabilities.

Looking ahead, the analyst has slightly trimmed his near-term revenue estimates for FLWR due to headwinds in the overall industry but he is maintaining his long-term estimates and currently attributes zero value to Terrace’s international assets.

“We maintain our Speculative Buy rating considering Flowr’s strengthened capital position, which we believe positions the Company well to execute its international growth plans. Our rating reflects the regulatory uncertainty in international cannabis markets, which constitutes ~40 per cent of our estimate of Flowr’s value,” wrote Kideckel.

“We believe Flowr is still on a high-growth phase, as the Company ramps up its Canadian and international operations. As such, the Company’s valuation is highly sensitive to revenue growth assumptions,” he said.

Kideckel is now calling for fiscal 2020 revenue and adjusted EBITDA of $10 million and negative $21 million, respectively, and for fiscal 2021 revenue and adjusted EBITDA of $51 million and $1 million, respectively. At press time, the analyst’s $0.75 target represented a projected return of 56 per cent.