Zuanic & Associates (Z&A) have initiated coverage on StateHouse Holdings STHZF, a key player in California’s fragmented cannabis industry. The company holds a strong brand presence in the local market, but, there might be some challenges ahead.
The Strategy and Its Execution
StateHouse aims to consolidate its position in California’s marijuana market. Its strategy includes leveraging its brand portfolio, optimizing store and brand mix, and reducing debt.
According to Zuanic’s report, half of its revenues come from its store network, with significant gross margins on in-house brands. However, market challenges have impacted sales at some of its top-performing stores.
Diversifying Revenue and Financial Outlook
StateHouse is exploring new revenue streams, including management services and strategic partnerships.
Despite a 17% year-on-year drop in revenues in 3Q23, there’s an increase in profitability and cash flow. The company’s net debt, however, remains a concern at 1.1x sales.
Performance and Market Dynamics
In 2022, StateHouse reported sales of $108.2 million, with an EBITDA of -$15.9 million. The FY23 sales are projected at $100.8 million, with an EBITDA improvement of -$1.0 million.
According to Zuanic’s report, the stock trades at approximately 2x EV/Sales. However, balance sheet concerns and a market cap of $11.9 million at a share price of $0.03 raise questions about its financial sustainability.
Valuation And Market Position
In a bullish scenario, Zuanic’s report highlights that STHZF could see significant growth.
The projections suggest that STHZF’s brands might achieve a 2% market share by 2026, with their stores reaching a 1.2% retail share. If the company attains a 4% blended retail/wholesale market share on a $9 billion market, its revenues could reach $360 million.
This would potentially elevate the company’s enterprise value (EV) to over $1.08 billion, more than five times its current EV, translating to over $2.25 per share, a significant leap from current levels.
However, the report also highlights the company’s valuation is higher than its peers, and its future depends on profitability, cash flow improvements, and potential asset divestitures.
“The main risk is that California’s market worsens, with new stores not adding to market growth, damaging retailer economics, and further price reductions due to legal competition, illicit market influence, and increased hemp derivative supply,” says Zuanic.
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