In Michigan, Gage Cannabis (Gage Growth Corp, CSE:GAGE) has managed to get itself on the radar of several research analysts this summer and all agree that the company is a buy. Eight Capital, Viridian Capital Advisors and PI Financial have all issued reports with Buy ratings and target prices ranging from C$4.25 to C$7.50. Gage was lately selling for C$2.47 on the Canadian Securities Exchange and $2.14 in the U.S. at the Over-The-Counter Marketplace.
The Michigan market has been strong and surprised many with the massive sales numbers that the state is logging. This past March, Michigan had monthly sales of $146 million, setting the state on track to hit over a billion dollars in sales. This is a huge number considering the healthy illegal market and fairly high legal prices, not to mention the lack of adult use cannabis outlets in Detroit. Viridian Capital believes Michigan could be the third biggest state for cannabis sales behind California and Colorado.
Currently there are 343 legal dispensaries in the state with privately-held Lume cannabis leading the market with 16 stores and 5% of the market share. There are 15 in second place with 12 stores, and Gage follows with nine stores. The multi-state operators (MSO's) are largely absent as the single-state operators (SSO) take the lead. Michigan is not a limited license state - a turn off for most MSO strategies these days. Viridian believes that Gage will increase its market share from roughly 3% in 2020 to nearly 13% of state sales this year and 24% in 2022.
As more stores open and prices begin to stabilize, consumers could be tempted to leave the illegal sellers. The state will also likely begin to put pressure on those operators as it sees a loss of greatly needed tax revenue.
PI Financial has the highest price target at C$7.50. Analyst Jason Zandberg believes the company has capitalized on its first mover advantage in the state, coupled with expansion plans. Gage plans to reach 20 retail locations by the end of 2021. The current locations already reach 90% of the states population with a one hour drive.
Zandberg noted, "Excluding one dispensary in a tourist area heavily impacted by COVID-19, Q1/21 average monthly retail sales was ~$1.1M/Month. Currently, 4 stores in the retail network are operating in excess of $15M annual run-rate. Additionally, the average basket size for Gage in 2020 was nearly double the state average. ($164 compared to the Michigan state average basket size of $85.) These are top performing cannabis retail metrics, not just for Michigan but also across limited license and competitive markets alike." He is also a big fan of the company's exclusive partners with Berner's Cookies brand. "Gage pays Cookies a 5% royalty on all of their products that they sell, whether it's a Gage store or a Cookies store," he wrote.
Gage has other exclusive state deals like a license to produce and distribute the SLANG product suite in Michigan, including its products O.penVAPE, Pressies, District Edibles, and Bakked. Zandberg also highlighted that Gage has a five year license agreement with OG Raskal Genetics to produce and sell their strains in Michigan. Said Zandberg, "In April 2021, Gage was granted a license to produce and distribute Blue River branded products in Michigan. Blue River bolsters Gage's portfolio of high quality vape and concentrate offerings."
Zandberg added, "We believe that trading multiples are likely to increase over the next 12 months as more capital flows into the U.S. cannabis sector. We believe the number of catalysts in the U.S. cannabis sector are numerous - including new states creating adult-use cannabis markets and changes to federal regulations around cannabis (MORE Act, STATES Act, SAFE Act)." He believes the risk to the story is whether MSO's have second thoughts and decide to enter the state.
Eight Capital has a target price of $6.50 for Gage Cannabis. The analysts like that Gage has the industry heavyweights of Canopy Growth (CGC) founder Bruce Linton and Jason Wild, the founder of JW Asset Management and Executive Chair of TerrAscend (TRSSF) . Their initiation of coverage in May estimates that Gage will capture 14% market share by 2023. "Fueling Gage's growth is a 133% increase in monthly cultivation capacity and 3x increase in its retail operations," read the report.
The brand partnerships are also listed as a differentiator for the company. Cookies, Lemonade, Runtz and Slang is giving depth to the retail stores lineups. "This significant differentiator has allowed Gage to command a price premium of 52%, while its basket sizes are 2x greater than the state average, both of which have exhibited stickiness even as capacity comes to the market."
The report cited increased capacity as an upcoming catalyst. Gage is expected to reach 3,000 pounds per month by July and 7,000 pounds by the end of 2021. Eight Capital also believes that Gage will have 29 dispensaries by the end of 2022.
Viridian had the lowest price target of C$4.25 of the group and thinks the company just had bad timing for going public in April as cannabis stocks in general have sold off since then. Analyst Jonathan DeCourcey believes the market pullback makes for a good opportunity price-wise. He wrote about a lack of investor awareness saying GAGE's IPO was not brokered, and the company has been relatively quiet in marketing the story historically. Like the others, he cited the plus of having Linton and Wild on board, the Cookies brand partnership and the established position in the state. He also thinks Gage is well funded and could acquire operators that it has partnered with.
DeCourcey wrote, "We expect GAGE to generate an approximate $500K adjusted EBITDA loss in Q1 and to report positive results thereafter. Within our forecast we have GAGE generating $24M in adjusted EBITDA in 2021 and $101M in 2022. Our adjusted EBITDA forecasts compare to a loss of $13M in adjusted EBITDA in 2020."
Unlike the other analysts, he thinks Gage could be a takeout candidate. He wrote, "Longer term we believe takeout is very much in play for GAGE whether from an MSO or Canadian operator (assuming eventual federal legalization) looking to enter the Michigan market with a splash."
Finally, these analysts all seem to be in favor of Gage Cannabis. The risks that they cite are risks that any operator could face in any market. Increased competition, changing consumer likes and regulatory risks. While Gage is making a successful run as an SSO, it's possible the company may expand beyond Michigan and repeat its success elsewhere.