Canaccord Genuity initiated covered on Plus Products Inc. (PLUS.CN) (PLPRF) with a 'Speculative Buy' rating and a price target of C$8.00. The stock was recently trading at C$5.86. This California-based company is known for its gummies that are sold in round tins.
Plus had the two top-selling products in the edibles category in California accounting for nearly 8% of that category's retail sales. Canaccord disclosed that "one or more of its affiliated companies intend to seek or expect to receive compensation for Investment Banking services from PLUS Products in the next three months."
The analyst Bobby Burleson believes the company will gain from its plan to expand its products beyond gummies into baked goods and mints. That being said, the report did note that gummy sales represent 36% of the edibles market in California, so it is already a popular form factor. Gummies account for 50% of the edibles sales in Oregon and Nevada. So if Plus were able to expand beyond the California state lines, consumers have already signaled they like cannabis gummies.
Reasons Why Gummy Sales Could Expand
California is cracking down on unlicensed dispensaries and that could spell share gain for Plus. Dispensary owners will need to play by the rules and only sell products that have met all the rules and requirements.
Consumers have already begun to trend away from buying traditional flower at the dispensaries and edibles have gained from this shift. Gummies as a percentage of California sales rose from 28% in January of 2018 to almost 45% in January 2019.
If Plus cannabis gummies are a big hit, just think how consumers will respond to hemp-derived CBD gummies. "We see significant long-term growth opportunities for hemp-based CBD," wrote Burleson.
Plus has plans to move beyond its home state of California. Nevada and Massachusetts look like they will be the first states for expansion. Those could be followed by Florida, Michigan and New York. "We estimate the expansion states and Canada could represent a combined market of more than $10 billion by 2022," wrote the analyst. Burleson said he thinks these expansion markets had the potential to add an incremental $72 million to his 2020 estimate.
Plus acquired Good Co-op Inc. for $2 million in an all-stock deal this past December. It is another California-based edible maker, but one that specializes in baked goods and in particular, brownies. Plus intends to use this acquisition to create baked goods like brownies and cookies, mints and hard candies. Baked goods command roughly 10% of the edibles sales in California.
Good lost its manufacturing license as it was building out its Sacramento plant at the time of the acquisition. Plus has actually expanded the site's production capacity.
The risks that the analyst listed seemed to be pretty standard ones, except for the cash flow. Burleson noted, "Plus remains cash flow negative in our model and requires significant capex to fund California growth and expansion initiatives in the near term, so the company may need to raise further capital to fund expansion initiatives." That is probably why in the disclosure Canaccord says it may be making money from the company within the next three months. At this time though Plus has $38 million in cash and $19 million in debt on the books.
Plus had estimated sales of $8.4 million in 2018, but a EBITDA loss of $6.5 million and negative free cash flow of $8.1 million. In the third quarter Plus reported revenue of $2.5 million, but the cost of sales was $2.1 million.
Canaccord thinks that Plus' sales will increase from an estimated 1.4 million packages sold in 2018 to 3.7 million in 2019. They also believe that the market share will double from 8% in 2018 to 15% this year, and 28% in 2020. That's a third of the market, which seems very ambitious with the amount of competition hitting the market.
Without a doubt the Plus gummies are a consumer favorite. Full disclosure, this reporter has purchased them and enjoyed the product. However, it seems that the analyst glosses over the expense of producing the risks, negative cash flow and focuses instead on very ambitious sales estimates.
Consumers in Nevada may be familiar with Plus, but most consumers in Massachusetts probably have never heard of the company. Yes, they are tasty treats, but there's no way to know whether a product that sells well in California will sell well in Massachusetts. Then there's the other big gummy company Wana Brands which is also available in Nevada and Michigan. Wana is the number one gummy in Colorado and it wasn't even mentioned in the Canaccord report.
Plus gummies are great products and the sales will surely rise, but they may not rise as much as this analyst thinks.
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