Canadian Liquor & Cannabis Chain Alcanna Is Undervalued: Price Target $10

Summary

• Alcanna's sales grew 10.9% in Q3, but the market still prices it like a dying business.
• The company is expanding rapidly into Cannabis and has great margins.
• Alcanna's lease obligations are completely manageable.

Alcanna Inc (TSE: CLIQ, OTC: LQSIF) is an Edmonton, Alberta-based liquor and cannabis retailer with 245 locations across British Columbia, Alberta, and Ontario. The company operates four primary brands: Wine and Beyond, Liquor Depot, Ace Liquor, and Nova Cannabis.

Alcanna is up 39% year-to-date, but I will explain why the stock is still undervalued given sales growth in its core business and the huge potential in its new line of business.

Alcanna is trading at $4.61 as of December 18th, but I believe it's headed to $10 within the next few months.

The company has been selling off portions of its liquor store business to fund new cannabis retail locations across Canada. Alcanna completely disposed of its foreign operations to focus on opportunities in the Canadian market. This year, it completed sales or otherwise disposed of 21 liquor stores in Alaska, nine on Vancouver Island, one in British Columbia, and one in Norwalk, Connecticut.

These closures are partially offset by 12 new cannabis dispensaries in 2020, bringing their total marijuana retail locations to 34.

The market is still pricing Alcanna like a dying business, despite the company increasing overall sales, same-store sales, and a growing cannabis business unit. Investors are also pricing Alcanna similar to other retail giants with sizable lease obligations. However, liquor stores have not been negatively affected at all by the Covid-10 pandemic. Many other retailers, such as clothing or houseware retailers, are in danger of shrinking and losing many of their locations.

Liquor sales, however, have never been better, and Alcanna is in a strong position to keep all of their locations open.

After a tough 2018 and 2019, shares are back up 39% year-to-date on strong sales growth and a promising expansion into cannabis sales. But the market has not rebounded enough, in my opinion. Alcanna still has room to grow, and the market will price the stock accordingly. For Q3 2020, same-store sales rose 14.7% compared to the previous year. Overall sales were up 10.9% during the same period.

Despite a 10.9% increase in sales for 2020, the market is pricing Alcanna like a declining business. Q4 of 2020 will almost certainly see rising sales due to the holiday season’s historically high liquor sales, as well as the higher likelihood of Canadians enjoying their alcohol at home rather than going out to bars and restaurants.

I also project that Alcanna’s sales will grow in 2021 based on upward trends in the liquor and cannabis markets. Even if Alcanna doesn’t grow at 10.9% in 2021 like it did in Q3, it certainly deserves much higher than a 0.29 sales multiple.

Alcanna’s move to cannabis sales is prudent. In Q3, the gross margin for cannabis sales was 33.5% compared to just 23.1% for alcohol. The cannabis market is also growing much more rapidly than the liquor market. Alcanna has plans to open up several new cannabis retailers in 2021, which will continue to boost sales.

Cannabis only makes up 7.6% of total sales, at $15.978 million CAD. With a growing market, new stores on the way, and management’s willingness to invest in the new sector, Alcanna is poised for large growth in the cannabis industry. At the same time, alcohol sales continue to increase, so the core business of Alcanna is still strong. Alcanna has access to capital and can easily open 12 to 15 new cannabis retail locations in 2021.

Valuation

Alcanna is trading at just 0.29x TTM sales and 2.48x book value. Based on Q3’s net profit of $5.65 million CAD, Alcanna is trading at 10.57x earnings.

The valuations are low considering the growing sales for both the core business and the cannabis business unit. Of course, we look to the balance sheet for potential problems that may justify this lower valuation.

The most apparent problem is Alcanna’s short-term liquidity. With a current ratio less than one and relatively high inventory, Alcanna could be seen as vulnerable if a downturn in business occurs.

At the end of Q3, Alcanna held $12.478 million CAD in cash, but showed $19.245 million CAD in accounts payable and other short-term accrued liabilities. Inventory stood at $105.533 million CAD at quarter end, implying an annual turnover rate of about 6.

The company has a credit facility of $70 million with the Canadian Imperial Bank of Commerce, and has been consistently sufficient at managing its short-term liquidity.

In terms of long-term debt, Alcanna is healthy. If Alcanna were in an industry severely affected by Covid-19 and related business closures, there would be some cause for concern. However, the liquor and cannabis business has been positively affected by people staying at home, and there is no reason to believe that Alcanna would not be able to cover the leases on their stores.

The company’s $258 million CAD in long-term lease liabilities seems manageable based on its number of locations and sales figures. At just over $3.4 million CAD generated per store on TTM basis, long-term lease liabilities of just over $1 million per store seems reasonable.

In addition, I have no reason to believe that Alcanna’s specific locations are undesirable. Even among the disposed locations, Alcanna was able to realize a decent gain. The company sold its Alaska operations (21 leased stores and one distribution center) for $26,509 million Canadian, or $19,449 million USD. The sale price represented more than a 100% premium from book value of the assets sold.

Based on the locations of those stores (mostly the Anchorage area), I concluded that the sale price implies the Alaska operations were healthy businesses, and not distressed assets in any way).

Overall, I believe Alcanna is a healthy, growing business that the market is not valuing fairly.