Northland Capital Markets initiated coverage on iAnthus Capital Holdings (ITHUF) with an Outperform rating and a C$9.50 price target. The stock was lately trading at C$6.16 ($4.64 in the U.S.) making that a 60% return. The analyst believes it is attractively priced compared to its peers in Canada whose lofty valuations he thinks are unsustainable.

Analyst Paul Penney said, "We believe IAN has not only amassed a high quality set of retail stores in decidedly favorable legalized markets, but more importantly has the smart/savvy management bench to successfully execute their well-defined growth plan." The analyst also noted that the impending MPX Bioceutical merger/acquisition was going to significantly expand the company's footprint.

The MPX deal has been met favorably by the iAnthus board and is expected to close by the end of January. Following this deal, iAnthus will be in 11 states with 15 cultivation and processing facilities, 63 dispensary licenses addressing a population of 112 million consumers. The company's employee roster grows to 375.

"We believe iAnthus is well-positioned to become one of the nation's premier recreational and medical legalized cannabis providers," said Penney. He noted that the new combined company will capture the best of both coasts. On the West Coast, iAnthus will be in Arizona, California, Colorado, Nevada and New Mexico. On the East coast, it will be Florida, Maryland, Massachusetts, New York and Vermont.

The analyst described what he expects will be "buckle your seat belt" revenue growth trajectory in the coming years. He estimates that revenue will jump from $5.8 million in 2018 to $165 million in 2019 and then a whopping $296 million in 2020. He is also forecasting that the earnings per share will move from $(0.86) for 2018 to $0.04 in 2019 and $0.16 in 2020. Penney suggested his estimates are on the conservative side.

Penney thinks that compared to its peers, iAnthus will be an ultimate winner due to its successful operations and financial execution versus just a quantity of licenses. He believes it ranks within the top five across its peer group.

The analyst said that he believes the average store requires $400,000-$800,000 in initial capital expenditures with a 10-18 month average payback. At full stabilization, the stores could reach an average of 50% gross margin.

State Breakdown

In Massachusetts, iAnthus owns six licenses and has nine retail licenses awarded. The market has a potential of $1.8 billion. Mayflower is the company's primary MA brand and it operates in the Boston market. iAnthus has one dispensary open in the state today with the others only able to supply medical cannabis. Penney said the company stands at the top of the first inning in its transition to a fully operational recreational state.

In New York, it owns four licenses and has 40 retail licenses awarded in a market with a potential of $3.1 billion. While New York currently is a very restrictive medical marijuana state, the new leaders in Albany signed their desire for legal adult use cannabis and the governor is on board. The analyst thinks it could even happen this year. iAnthus' brand in New York is called Citiva and its main flagship store will open in Brooklyn across from the Barclays Center on December 30. The other three locations are in Staten Island, Dutchess County and Chemung County.

In Florida, the company owns 30 licenses and has a whopping 420 retail licenses awarded. This market has a potential size of $1.7 billion. Vermont does not allow retail adult use sales. For now only two stores are open, but the analyst said he expects they will have roughly 18-20 open by the end of 2019.

On the West Coast, the company owns four licenses in Arizona and has 130 retail licenses awarded, although the market potential is only $700 million. It's an active medically legal state, but Penney said it is on a clear path to becoming legal for adult use within 12-18 months. "We believe it is clear that IAN is in the fast lane in establishing one of the strongest medical marijuana brand identities within the Arizona market," said Penney. It operates under the Health for Life and The Holistic Center brand names.

The portfolio of all these brands began as an effort to build well-known local names. However, Penney thinks that for long-term success a nationally known name would be better. The analyst thinks the company will formally announce a new comprehensive national brands.

Risks

The risks mostly focus on the unsettled nature of cannabis in the U.S. since it is still federally illegal. iAnthus also has a limited amount of history and the markets are untested. Penney did point out that the company has engaged in some large financing activities that must be met and it will have to repay those obligations when they are due. If the revenues don't come through as planned then it could put stress on the company.

Note from author: Please note that due to factors including low market capitalization and/or insufficient public float, we consider several names mentioned to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.