TILT Holdings: Long-Term Opportunity Intact; Expect 1H/22 Pressures And Likely To Need Capital
Summary
- Modest Q4 miss on pricing pressure and some reduced hardware spending.
- ’22 guidance was lower than expected on macro pressures. Believe there are sources of upside beyond targets.
- Remain positive on brand partnership strategy and expect to bear greater fruit on scaled cultivation/production capacity and as pricing pressure impacts East Coast markets.
- Shinnecock Nation agreement (in NY) offers potential formeaningful growth.
- Cash an issue. Expect companywill have to complete financing to fund NY expansion and loomingdebt issues. Confident that non-dilutive sources of financing areobtainable.
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TILT Holdings (OTCQX:TLLTF) reported Q4/21 revenues of $54.1M and $4.8M in adjusted EBITDA. Both came in modestly below our estimates ($57M/$6.8M) and guidance of $56M/$7M. The underperformance can be attributed to more cautious customer spending on hardware inventory for 1H/22 along with continued higher freight costs for Jupiter. Despite the miss on earnings, Q4 marked another period of significant progress in TILT’s turn-around toward becoming a well-positioned MSO that is poised to take share in its core plant-touching markets this year. In Q4, TILT furthered its position as a partner to leading third party cannabis brands by adding new products to its portfolio and deepening the penetration of existing relationships, enhanced cultivation and production capabilities in both Massachusetts and Pennsylvania and finally received long-awaited approval to commence recreational retail sales opening two rec dispensaries in Massachusetts. We expect each to bear fruit this year and beyond.
With that said, as with many operators in the industry, TILT expects to face some challenges in the first half of 2022 related to pricing pressure on wholesale products sold and lower customer spending on hardware given the pushout of some new market openings (including New Jersey and New York). Management guided to 2022 revenues in the range of $255M to $265M and adjusted EBITDA between $27M and $32M. Guidance comes in well below our prior estimates of $284M/$54M however we note that by Q4 we expect the company to be on an annualized run rate for both revenues and adjusted EBITDA that exceeds those levels with additional upside to come if TILT is successful in getting its planned Long Island dispensary open before year-end at scale or if a Q1/23 start to the New York adult market appears certain in 2H/22. TILT as a leading hardware supplier should be an early beneficiary an anticipated New York market ramp as operators in the state shore up vape hardware supply ahead of year-end.
We revise our estimates to guidance and reduce our price target to $0.50. Our rating remains Buy as we are positive on the stock given its cheap valuation particularly on an EV/Sales and on TILT’s numerous opportunities for profitable growth in the coming years particularly if Pennsylvania and/or Ohio pass rec legislation this year. With that said, we believe additional capital is required for growth and maturing debt and feel cash should be a focus of investors in the immediate term. We are confident that non-dilutive financing options are available however execution bears watching.
Partnership Provides Low Cost Exposure to NY
On the earnings call, management highlighted the expectation that initial contributions from TILT’s New York tribal partnership with the Shinnecock should come before year-end so long as state regulators permit existing medical operators to supply the market with wholesale product ahead of the flip to rec. TILT’s planned cultivation and production facility will likely be ready in early 2023.
Whether the opening at any scale happens this year or not, the Shinnecock operation has a runway to scale and become a significant asset in the state before the larger adult use operators are able to scale in any way. The early mover benefits could be meaningful for TILT which is contracted to collect 11.25% of all revenues collected and nearly 19% of cash in exchange for an upfront investment and management of the operation. TILT’s total investment is expected to be roughly $18M which pales in comparison to the amount being invested by MSOs in seeking out the original medical licenses (including yesterday’s >$240M investment by RIV Capital to buy Etain Health).
Additional Capital Required
TILT ended Q4 with roughly $7M in cash and has drawn down the majority of its $10M credit facility. We remain confident that TILT can be cash flow neutral with existing operations for the foreseeable future however it appears that additional financing will be required in order to fund the New York project ($18M committed) and any additional expansion projects. While management will also need capital in order to fulfill the company’s looming debts ($36M due in November and another $36M next year). In having improved the balance sheet in recent years and by becoming a more profitable operation in recent quarters, we believe management has put TILT in position to raise additional capital in a non-dilutive fashion including with a sale lease back of the recently acquired Taunton cultivation/production facility or by taking on a capital partner that has New York interests. With that said, we expect the stock performance will remain constrained until the issue is resolved.
We revise our estimates and reiterate our price target
- Revenues: Q1/22 from $65M to $50M; 2022E from $284M to $257M; 2023E initiated at $309M.
- Adjusted EBITDA Q1/22 from $9.4M to $2.2M; 2022E from $54.2M to $28.8M; 2023E initiated at $50.2M.
Our $0.50 Price Target reflects an EV/EBITDA multiple of 10.4x our 2022 estimate and EV/Sales of 1.2x and 2023 multiples of 6.0x and 1.0x respectively.
FY Income Statement ($M)
2020 | 2021 | 2022 | 2023 | |||||||||
2020 | 2021 | Q1 '22E | Q2 '22E | Q3 '22E | Q4 '22E | 2022 | Q1 '23E | Q2 '23E | Q3 '23E | Q4 '23E | 2023 | |
Dec-20 | Dec-21 | Mar-22 | Jun-22 | Sep-22 | Dec-22 | Dec-22 | Mar-23 | Jun-23 | Sep-23 | Dec-23 | Dec-23 | |
Revenues | 163 .7 | 202 .7 | 50 .0 60 .0 72 .0 75 .0 | 257 .0 | 68 .0 74 .0 84 .0 83 .0 | 309 .0 | ||||||
Gross Profit | 58.5 | 58.2 | 13.0 15.6 20.2 25.4 | 74.1 | 20.4 22.9 26.9 28.2 | 98.4 | ||||||
Opex | 101.2 | 98.8 | 18.0 18.0 19.0 19.0 | 74.0 | 18.0 18.0 20.0 20.0 | 76.0 | ||||||
Operating Income | -42.7 | -40.6 | -5.0 -2.4 1.2 6.4 | 0.1 | 2.4 4.9 6.9 8.2 | 22.4 | ||||||
Other Income | -22.9 | -6.8 | -2.5 -2.5 -2.5 -2.5 | -10.0 | -2.5 -2.8 -2.8 -2.8 | -10.9 | ||||||
Pre-tax Income | -65.6 | -47.4 | -7.5 -4.9 -1.3 3.9 | -9.9 | -0.1 2.1 4.1 5.4 | 11.5 | ||||||
Taxes | -6.6 | -4.8 | 4.4 4.3 4.4 4.4 | 17.5 | 4.4 4.3 4.4 4.4 | 17.5 | ||||||
Net Income | -105 .8 | -43 .5 | -11 .9 -9 .2 -5 .7 -0 .5 | -27 .4 | -4 .5 -2 .2 -0 .3 1 .0 | -6 .0 | ||||||
EPS | -0.3 | -0.11 | -0.03 -0.02 -0.01 0.00 | -0.1 | -0.01 -0.01 0.00 0.00 | 0.0 | ||||||
Shares | 366.0 | 377.4 | 388.9 390.8 392.8 394.7 | 391.8 | 395.1 397.1 399.1 401.1 | 398.1 | ||||||
0.0 | ||||||||||||
Interest | -3.8 | -0.6 | -0.8 -0.8 -0.8 -0.8 | -3.2 | -0.8 -0.8 -0.8 -0.8 | -3.2 | ||||||
Finance Expense | 10.8 | 11.0 | 3.2 3.1 3.1 3.3 | 12.7 | 3.2 3.1 3.1 3.3 | 12.7 | ||||||
Income Tax | -6.6 | -3.9 | 4.4 4.3 4.4 4.4 | 17.5 | 4.4 4.3 4.4 4.4 | 17.5 | ||||||
Depreciation | 22.8 | 23.3 | 5.5 5.5 5.5 5.5 | 22.0 | 5.5 5.5 5.5 5.5 | 22.0 | ||||||
EBITDA | -35.8 | -13.7 | 0.4 2.9 6.5 11.9 | 21.6 | 7.8 9.9 11.9 13.4 | 43.0 | ||||||
0.0 | ||||||||||||
Adjusted EBITDA | 10 .2 | 22 .5 | 2 .2 4 .7 8 .3 13 .7 | 28 .8 | 9 .6 11 .7 13 .7 15 .2 | 50 .2 | ||||||
Gross Margin | 36% | 29% | 26% 26% 28% 34% | 29% | 30% 31% 32% 34% | 32% | ||||||
Adjusted EBITDA | 6% | 11% | 4% 8% 11% 18% | 11% | 14% 16% 16% 18% | 16% | ||||||
OPEX | 62% | 49% | 36% 30% 26% 25% | 29% | 26% 24% 24% 24% | 25% | ||||||
Operating Income | -26% | -20% | -10% -4% 2% 8% | 0% | 4% 7% 8% 10% | 7% | ||||||
Net Income | -65% | -21% | -24% -15% -8% -1% | -11% | -7% -3% 0% 1% | -2% | ||||||
Revenue Growth | ||||||||||||
Y/Y | 7% | 24% | 7% 24% 35% 39% | 27% | 36% 23% 17% 11% | 20% | ||||||
Q/Q | -8% 20% 20% 4% | -9% 9% 14% -1% | ||||||||||
Adjusted EBITDA | ||||||||||||
Y/Y | 120% | -64% -28% 67% 184% | 28% | 336% 150% 66% 12% | 74% | |||||||
Q/Q | -54% 114% 76% 65% | -30% 22% 17% 11% | ||||||||||
Source: Company Reports, Viridian Capital Estimates
Required Research Disclosures
Distribution of Ratings/IB Services | ||||
IB Services in Past 12 months | ||||
Rating | Count | Percent | Count | Percent |
Buy (Buy) | 14 | 100% | 0 | 0% |
Hold (Hold) | 0 | 0% | 0 | 0% |
Sell (Sell) | 0 | 0% | 0 | 0% |
Not Rated (NR) | 0 | 0% | 0 | 0% |
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Comments (2)
CBD flowers and
CBG flowers (CBG is anti-tumoral and a hedge for safety and probably needs to be in EVERY flower preroll for that reason alone) then the spaces between the small pieces of flower in the preroll allow for a vaporizer action as we draw air through the preroll :-)So, WHY would people spend lavishly on vape tech. when we can still vape even without the tech. :-)