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Alcanna Inc. – LQSIF (OTC); CLIQ (TSX)

Should you invest in Alcanna Inc.LQSIF (OTC)?
Recommendation: See Below

Should you invest in Alcanna Inc. - LQSIF (OTC)?Alcanna Inc. sells alcohol and cannabis in Canada. Each product is a distinct unit, has separate management structures, and their own marketing strategies and brands.

Fundamentals
Profile:
HQ: Edmonton, Canada
Founded: 2004
Facilities: Alberta, BC, Alaska
Symbol: LQSIF (OTC), CLIQ (TSX)

Focus: Strong
Alcanna is focused on maintaining its position as the largest private-sector retailer with 258 stores of alcohol in North America and the largest in Canada. Alcanna is also aiming to expand its Cannabis retail stores business under the brand of “Nova Cannabis”. Margin enhancement is its core priority while retaining and growing market share across North America.



Size: Neutral
Market Cap: US $113.8 mil
Enterprise value: US $420 mil
# of employees: 2,242

Markets: Strong
Primary: Canada
Secondary: USA, Europe
Major Subsidiaries: Liquor Stores Limited Partnership, Liquor Stores GP Inc., Liquor Barn Limited Partnership, Brown Jug, Inc.

Should you invest in Alcanna Inc. – LQSIF (OTC)? Recommendation: See Below

Operations: Weak
Cultivation:
Current production: Distribution focused company, does not manufacture or cultivate products
Future production: NA

Distribution:
Direct sales: None

Store networks: 258 Stores selling alcohol and 15 pharmacies selling cannabis products

Supply agreements: Agreement with Aurora Cannabis for cannabis distribution

Integration/Diversification:
Vertically integrated: No
Horizontally diversified: Yes

Financials:  Strong
Outstanding shares (diluted): 22.65 mil
Revenue Ranking in the Cannabis Industry: #50
Last Three-Quarters Revenue: $569.7 mil
EPS (diluted): -0.43

Should you invest in Alcanna Inc. – LQSIF (OTC)? Recommendation: See Below

Best Hemp and Cannabis Stock Investment

Management: Neutral
CEO: James Burns
CFO: David Gordey
James Burns, CEO of Alcanna brings more than 10 years of experience in senior management positions in the restaurant and beverage industry. Alcanna’s CFO David Gordey has more than 10 years of experience in the beverage industry. There is none in senior management with experience in running and managing Cannabis business.

Branding: Strong
Alcanna is a leading liquor retail brand in its respective market. ‘Liquor Depot’ is marketed as a convenience focused brand, ‘Wine and Beyond’ is a destination/large format store brand, ‘Brown Jug’ is a convenience focused brand in Alaska, ‘Ace Liquor’ is a convenience focused store in Alberta and the Nova Cannabis brand is targeted towards its cannabis retail stores.

Valuation: Strong
Current share price: US $3.39
Price to Sales: 0.20 (Tobacco industry Avg. = 5)
Price to Book: 0.54
52 week low/high: US $2.54 to $5.71
EV / Revenue: 0.73

Financings: Neutral
Alcanna raised $22.4 million in nine months ending September 30, 2019, as compared to $98.2 million from the same period in the last year in 2018. The decrease in financing in 2019 is caused by the issuance of common shares in 2018 from Aurora Cannabis private placement through which Alcanna received cash proceeds of $136.9 million. Aurora Cannabis acquired 25% ownership of Alcanna.

Risks: Neutral
The risks of investing in this company may be somewhat lower than many cannabis companies in that they are solely focused on retail distribution and not cultivation. Far fewer regulatory risks drive their revenue.

Recommendation: Strong
Alcanna is focused on maintaining its position as the largest private-sector retailer with 258 stores of alcohol in North America and the largest in Canada. Alcanna is also aiming to expand its Cannabis retail stores business under the brand of “Nova Cannabis”.

Alcanna has strong market penetration in Alberta where the local economy is struggling. Alcanna used their positioning to their advantage and opened five retail stores to sell Cannabis which returned strong sales. Alcanna has a large opportunity to be the leading retailer of cannabis in Canada.

The cannabis retail market in Canada did not perform well in recent years as there was a shortfall of supply, however, Alcanna overcame this hurdle by undergoing a strategic partnership with Aurora Cannabis. Alcanna is planning to open 25 additional stores in Ontario.

Will its stock price improve in the long term? Likely

Alcanna has increased its total debt, which includes current and long term liabilities, in the last twelve months to CA $384.7 million from CA $135.1 million to support their expansion plans. Alcanna’s current cash and short-term investment position in the last 9 months is at CA $121.2m, which they intend to invest in their business. They have sufficient current assets to meet their current liabilities in the near term. Combine this with their very low P/S and Alcanna looks like a good investment.

Aurora Cannabis showed its confidence in Alcanna by buying 25% of its shares and lent their branding to their new cannabis stores opened last year. Aurora Cannabis can buy up to 40% of its shares but it seems they will eventually buy the entire company or its cannabis retail business.

In Canada, this year’s market size of cannabis is $5 billion and it will increase up to $10 billion within the next coming 4 to 5 years. Cannabis retail businesses can prove to be great growth opportunities and they are likely to gain market share.

For these reasons, we think Alcanna, at or near its current price of $3.39 a share, can be a good investment opportunity—though as earnings decrease with sales and expenses increased then opportunity can disappear.

Should you invest in Alcanna Inc. – LQSIF (OTC)? 


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