Alcanna (TSX:CLIQ) is engaged in the retailing of wines, beers, and spirits, and the retailing of cannabis. As at September 30, 2019, the company operated 260 retail liquor stores – of which 205 were in Alberta, 33 in British Columbia, 21 in Alaska, and one in Connecticut.
The company operates nine retail cannabis locations in Alberta and has obtained the permits to use the Nova Cannabis brand. The company reports higher earnings in the third and fourth quarters.
Based on my calculations, using a discounted cash flow valuation model, I determined that Alcanna has an intrinsic value of $5.60 per share.
Assuming less-than-average industry growth, the intrinsic value would be $5.16 per share, and higher-than-average industry growth would result in an intrinsic value of $6.10 per share.
At the current share price of $4.40, I believe Alcanna is slightly undervalued. I would recommend investors follow Alcanna into 2020 for an ideal opportunity to buy shares of the company. In the event of a market contraction, investors will be able to purchase Alcanna at a steeper discount.
Alcanna has an enterprise value of $281 million, which represents the theoretical price a buyer would pay for all of Alcanna’s outstanding shares plus its debt. One of the good things about Alcanna is its moderate leverage, with debt at 30.8% of total capital versus equity at 69.2% of total capital.
For the nine months ended September 30, 2019, the company reports a mediocre balance sheet with $503 million in negative retained earnings. This is not a good sign for investors as it indicates the company has more years of cumulative net loss than net income. The only thing that abates my concern regarding this is the support of Aurora Cannabis, which owns 25% of Alcanna’s outstanding shares.
The company reports a cash balance of $11 million with $18 million in short-term debt obligations. I am not overly concerned about this as Alcanna has a credit facility, however, I would like to see enough cash on hand to cover short-term obligations for a company with this history.
Overall revenues are up sharply to $570 million, from $468 million in 2018 (+22%) driven by its acquisition of 28 Solo Liquor stores. Operating expenses are down slightly year over year, which has resulted in operating profits of $21 million (up from $285,000 in 2018). Pre-tax loss of $22 million is down from a $10 million loss in 2018.
The company remains committed to managing its long-term debt as indicated by a $30 million pay down in 2019 (following a $30 million pay down in 2018). This was offset by a $64.5 million draw in 2019.
Investors that are looking to diversify into the cannabis and alcohol industry should consider buying shares of Alcanna. With an intrinsic value of $5.60 and a current share price of $4.44, I believe investors will benefit from investing in the company. I would recommend following the stock into 2020 as a potential correction in the market could lead to buying shares at a lower price.
I am a bit concerned about the company’s growing negative retained earnings and its moderate debt at 30.8% of total capital. That said, the fact that Aurora Cannabis owns 25% of outstanding shares provides the company with access to liquidity that will help fuel growth.
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Fool contributor Chen Liu has no position in any of the stocks mentioned.