COVID-19 case numbers in the US are at record levels and many market commentators are talking about the potential for a second shutdown to control the outbreak. Although we do not expect to see the country shutdown like it did the first time, we expect to see some states take action (i.e. closing bars and limiting the amount of indoor dining) to try and curb the spread of the outbreak.
During the first shutdown, the cannabis industry was one of the few industries to be declared as essential. Cannabis dispensaries initially benefited from the first shutdown and many companies recorded a substantial increase in sales in March as consumers stocked up on products.
If a second shutdown was enforced, we expect the cannabis industry to record another spike in sales and believe that many businesses would benefit from it. Today, we have highlighted 3 companies that benefited from the first shutdown and that are positioned to be beneficiaries of a second shutdown.
Jushi Holdings: Levered to Burgeoning US Cannabis Markets
Last week, Jushi Holdings Inc. (JUSH.CN) (JUSHF) released first quarter financial results and pre-announced its second quarter revenues that exceeded our expectations. The company is highly focused on the US cannabis industry and has acquired assets in strategic state markets. Over the next year, we expect Jushi to see a rapid improvement in revenues, margins, and profits, and believe that it has significant potential catalysts for growth.
During the first quarter, Jushi generated $8.6 million of revenue, which represents a more than 40% increase on a sequential basis. With almost $50 million of cash and securities on the balance sheet as of March 31st, the company is well positioned to execute on previously announced initiatives and open additional retail outlets in Illinois, Pennsylvania, and Virginia.
One of the most impressive parts of the earnings report is related to the second quarter guidance and we believe that the market does not fully appreciate it. Jushi expects to generate $15 million of revenue in the second quarter and reported an annualized revenue run-rate for June of approximately $69 million.
Last week, we had the opportunity to speak with a member of the Jushi team and left the conversation feeling confident it the long-term strategy. So far this year, the dispensaries that have transitioned over to recreational in Illinois have recorded incremental revenue growth since opening. This is a trend that is expected to continue, and we are favorable on the geographic diversity of the business.
Jushi has not been immune to COVID-19 and the annualized run-rate includes the negative impact of two closed Philadelphia stores due to break-ins at the end of May. If these stores were included in the run-rate, the number would be approx. $78 million, and we are favorable on how the business has been ramping up. After the stores re-opened, Jushi has seen revenues spike higher and this is a trend that our readers should be aware of.
2020 has been a banner year for the US cannabis company and we are bullish on the growth prospects that are associated with the markets that it is focused on. Over the next year, we expect Jushi to open new dispensaries in Illinois and Pennsylvania and expect the new stores to be a catalyst for growth on a going forward basis.
At current levels, Jushi is trading at a considerable discount to its peers and we find the valuation to be compelling. As the company continues to execute on its expansion strategy, we expect the risk-reward profile to continue to become more favorable and this is an opportunity that we are excited about.
ManifestSeven: Executing on Growth Initiatives to Improve Profitability
ManifestSeven (M7) is a California company that has attractive leverage to some of the most important verticals of the cannabis value chain and it has seen an uptick in demand despite the spread of COVID-19.
One of the reasons we are excited about M7 is due to the structure of it. The business is comprised of a number of divisions and we are favorable on the amount of value that can be found between the assets. The management team has doubled down on finding synergies between its divisions and we are favorable on how these actions will improve profit margins.
M7 is California’s first omnichannel for legal cannabis, servicing both business-to-business (B2B) and business-to-consumer (B2C) markets. The ancillary cannabis company has numerous distribution hubs across that state, and on the retail, side has acquired the likes of leading delivery service MDelivers, MyJane, a curated subscription service for women, and 1-800-CANNABIS, the phone and online gateways for the retail experience.
M7 is one of the few companies to have benefited from the COVID-19 outbreak and it has been able to turn a negative into a positive. During the COVID crisis, the company benefited from cannabis being declared an essential industry. The delivery and dispensary side of the business have been major value drivers for M7 and this is a trend that is expected to provide a long-term tailwind as it relates to growth.
Another reason we are excited about M7 is related to the work that the management team has done to bring the business down a path to profitability. In the second quarter, M7 was able to drastically reduce expenses while growing revenues by 30%. We believe that the changes that have been implemented have made the business a more attractive opportunity and will monitor how the story continues to evolve.
M7 expects to commence trading on the CSE in the second quarter of 2020 and we are monitoring how the story continues to advance ahead of the planned listing, which could be as soon as mid-July. The company expects to be reporting positive adjusted EBITDA this year and to record a 100% increase in revenue when compared to 2019. M7 is an opportunity that we will be closely following and is one that we are excited about.
Driven: Benefiting from Increased Demand for Delivery Services
One of the most significant impacts that COVID-19 has had on the consumer is related to how they shop. During the crisis, we have seen a substantial increase in demand for delivery services as consumers look to limit the amount of time, they spend in retail outlets. E-commence has also been a major beneficiary of the crisis and Driven Deliveries (DRVD) is a business that has benefited from these trends.
Driven Deliveries is working to capitalize on the cannabis delivery market and has been executing on a strategy to increase market share in California. The state has been significantly impacted by COVID and many retailers have come under pressure as a result of the outbreak. During this time, Driven Deliveries has recorded an increase in demand for its services and we are favorable on this trend.
As a result of the pandemic, Driven Deliveries has reported impressive growth and we attribute much of the success to the strength of the platform from a technological standpoint. When compared to its peers, the company’s platform does a great job at generating consumer awareness for cannabis brands. Between March and April, Driven Deliveries recorded a substantial uptick in business, and this is a trend that has persisted throughout the pandemic.
Later this year, Driven Deliveries plans to expand into new markets in the US and we expect this to be a catalyst for growth. For a small cost, the company can replicate the model that it has in California in additional cannabis markets and we are favorable on the strategy that is in-place as it relates to this opportunity. Going forward, the management team plans to continue to focus its efforts on the California market and we will monitor how the story advances from here.
During the last year, Driven Deliveries has been executing on a series of organic and inorganic growth initiatives and this is a trend that we have been following. These transactions have significantly enhanced Driven Deliveries’ growth prospects and has improved the risk-reward profile. At current levels, we find the valuation to be compelling and will be keeping an eye on how the story continues to advance.