iAnthus: Let It Be

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About: iAnthus Capital Holdings, Inc. (ITHUF), Includes: ACRGF, CGC, CRLBF, CURLF, GTBIF, HRVSF, MMNFF, TCNNF
by: Jonathan Cooper
Summary

iAnthus is a mid-sized U.S. multi-state cannabis company formed through a merger.

Until May 14, iAnthus stores were known by a mish-mash of names, preventing the company from properly benefiting from their national platform.

iAnthus now has a national retail brand: Be.

All dollar figures are in U.S. dollars unless otherwise noted.

iAnthus: Dispensary footprint by state

iAnthus (OTCQX:ITHUF) is a mid-sized U.S. multi-state cannabis company ("MSO") formed through merger. Partly because it was formed through mergers, iAnthus operates retail stores under a variety of different names including Citiva, Mayflower, and Health For Life.

This varied branding reduces the effectiveness of having a national footprint. One of the primary benefits of such a footprint is being able to leverage advertising and brand awareness, which can reduce overall advertising costs and may be beneficial in gaining tourist sales in recreational cannabis states.

On May 14, iAnthus introduced a new national brand for its retail cannabis stores: Be. The brand is designed to be fun, welcoming, and comfortable for both new and experienced users.

iAnthus is slightly less costly than many of its peers, with the exception of MedMen. While value investors are likely to shy away from a company trading at 19x annualized sales (last quarter annualized, pro forma), growth investors may be attracted to iAnthus since it trades at about 3.7x estimated 2020 sales and about 14x 2020 EBITDA, according to analyst estimates.

iAnthus: National Footprint

iAnthus currently operates 21 cannabis dispensaries spread across eight states and has 68 total dispensary licenses spread across 10 states. The majority of those licenses are in Florida, where iAnthus operates three stores but where each dispensary license allows for 35 stores, as outlined in my coverage of the Florida Cannabis Market last week.

iAnthus' current footprint was created through a C$1.6 billion merger with MPX Bioceuticals in a deal announced in October 2018 and closed in February 2019 after MPX shareholder approval.

iAnthus wears different hats in different states including GrowHealthy, Health for Life, Mayflower, and Citiva

Source: iAnthus investor presentation.

After this and other mergers, iAnthus retail stores operate under a mishmash of different names in different jurisdictions including Citiva, Mayflower, GrowHealthy, and Health For Life.

This variety of names is not uncommon among multi-state cannabis companies. Most MSOs were built through mergers and acquisitions, with deals being used to add licenses in new states enabling a well-funded public company to expand quickly by taking over the licenses, and sometimes retail footprint, of smaller cannabis licensees and operators. For example, Canopy Growth (CGC) target Acreage Holdings (OTCQX:ACRGF) is in the process of converting its national retail branding to The Botanist.

Operating stores under a variety of different names limits the benefits of a national retail footprint. Due to federal laws making cannabis illegal, MSOs cannot ship cannabis across state borders, so a national footprint does not allow MSOs to operate large centralized cultivation or processing centers. Thus, national branding is one of the larger reasons to operate an MSO in the first place, given the inability to centralize production. (There also are other benefits to the MSO model, including improved access to capital from scale and being publicly traded and being able to afford a stronger management team.)

National branding will enable MSOs to more effectively leverage advertising through traditional media (where permissible) and through online and social media. For example, MedMen (OTCQB:MMNFF) is able to benefit from a strong national presence that allows a single Spike Jonze advertisement to attract consumers to stores across the nation, from Los Angeles to Miami to New York and Chicago. National branding may be especially effective in states that allow recreational cannabis, since a tourist may be more likely to visit a trusted store brand they know from home than an unfamiliar local cannabis store in the same way a subset of travelers might prefer to stop at a Wendy's over an unknown diner.

"Retailers trade at one times revenue, owners, or brands trade at five times. We want to be on the brand side of the equation."

Hadley Ford, iAnthus CEO, Fourth Quarter Earnings Call

iAnthus' management is well aware of the benefits of national branding. Management had previously been waiting on the iAnthus deal to close and were then focused on the integration of those two businesses, as discussed at the end of their third quarter earnings call in November 2018. But after the close of that deal in February 2019, management has been working toward creating a national brand for the combined iAnthus/MPX platform.

Be.

On May 14, at the Cannaccord Genuity Cannabis Conference in New York, iAnthus unveiled their new cannabis brand: Be. The full iAnthus presentation is available online as well as the stand-alone Be advertisement above on YouTube and iAnthus' official press release.

iAnthus' stores are designed by Elizabeth Stavola, who previously helped create the MPX Bioceuticals' Health For Life stores in Arizona and Maryland. Ms. Stavola joined iAnthus after their merger with Maryland and is both a director of iAnthus and also its chief strategy officer. She also created the CBD For Life brand, which was purchased by iAnthus in March 2019 for $14 million and which is available in six Urban Outfitters stores in New York and California.

These stores are designed to provide a welcoming, comfortable environment for both new and dedicated cannabis users. Be stores will carry both iAnthus brands as well as third-party brands. Stores will be designed to be large and inviting and placed in high-traffic locations in cities around the country, including Boston, Miami, Atlantic City, and Las Vegas.

One Twitter user posted a look at a Be store, showcasing an interior of white marble and wood, with a very clean design. It remains to be seen whether this interior design will be used for Be stores. The first flagship Be store is set to open in early Q4/19 in Brooklyn, with re-branding of existing stores following that opening.

In my view, the move to a national brand is a strong positive for iAnthus. This will enable iAnthus to achieve added benefits of a national footprint, including increased brand awareness, the potential for added recognition for tourists, and the ability to launch and better leverage national or online advertising campaigns. It remains to be seen whether consumers are attracted to the "Be" name or its associated advertising. In my view, the YoutTube advertisement is the strongest (and most fun) aspect of the presentation, but I'm unsure that the clean, sterile look of the Miami store's interior matches the lively advertising campaign. However, that's only one view, and I'd hesitate to draw many inferences from a single Twitter post of a single store.

Valuation and Peers

iAnthus believes that it trades at a discount compared to peers.

Source: iAnthus investor presentation.

iAnthus believes its stock trades at a discount relative to other MSOs, so perhaps the launch of a store brand and the resulting increasing brand awareness may lessen that gap.

iAnthus perhaps trades at a slight discount to peers, especially Curaleaf, Harvest Health, and Cresco Labs

Relative valuation: Compared to its peers, iAnthus appears to trade at a slight discount to its largest peers such as Curaleaf (OTCPK:CURLF), Harvest Health (OTCQX:HRVSF), Acreage Holdings, and Cresco Labs (OTCQX:CRLBF). However, iAnthus' valuation looks to be approximately in line with peers like Green Thumb (OTCQX:GTBIF) and MedMen (OTCQB:MMNFF).

On an EV-to-sales basis (pro forma), iAnthus is more costly than MedMen and Green Thumb but cheaper than its other peers. The former trades at a relatively low EV/sales ratio for the sector due partly to dilution that isn't accounted for above but also due to poor cash flow, including a $75 million operating cash flow deficit in the fourth quarter of 2018.

iAnthus has a 2% market share in Florida according to data from the State of Florida

On an EV-per-dispensary-license basis, iAnthus is significantly cheaper than the majority of the peer group it has chosen, although somewhat comparable to MedMen. However, the majority of iAnthus' dispensary license footprint is in Florida where the company has limited operations with only three dispensaries open (of 121 in the state) and has only 2% market share.

iAnthus also is somewhat cheap on an EV/open dispensary basis, costing $52 million per open dispensary which is more costly than MedMen or Trulieve (OTCPK:TCNNF) but less costly than the other listed MSOs, some of which cost more than $150 million per open dispensary.

Ultimately, very few (or none) of these companies are likely to attract dyed-in-the-wool value investors. Even after declines on Monday, the cannabis sector remains priced for rapid growth.

Earnings and forward estimates: For example, analysts expect iAnthus to generate approximately $300 million in revenue in 2020 with approximately 25% EBITDA margins. Given those figures and a $1.1 billion enterprise value, iAnthus trades at about 3.7x 2020 sales and 14x 2020 EBITDA.

iAnthus is not profitable and lost $11 million in EBITDA last quarter.

In its December quarter, iAnthus generated $2.2 million in reported revenue, $3.2 million in reported and managed revenue, and $14.8 million in pro forma revenue with most of the added revenue coming from MPX Bioceuticals. During the same quarter, iAnthus generated an EBITDA ex-fair value adjustments loss of $10.5 million and a pro forma adjusted EBITDA loss (excluding share-based compensation) of $10.7 million.

iAnthus has not announced an earnings date for their March 2019 quarter yet. Last year, iAnthus reported first quarter earnings on May 30, so it's likely they will report around the end of the month.

Happy investing!

Disclosure: I am/we are long CGC, TCNNF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.