Alcanna Inc. Report

Alcanna Inc. (CLIQ, Toronto)

RESEARCH SUMMARY

Report Author(s):

InvestorsFriend Inc. Analyst(s)

Author(s)’ disclosure of share ownership:

 The Author(s) hold no shares

Based on financials from:

2020 Y.E.

Last updated:

March 28, 2021

Share Price At Date of Last Update:

 $                               7.83

Currency:

$ Canadian

Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual):

(lower) Sell at $7.83

Qualifies as a stock that could be bought with confidence to hold for 20 years?

No

Has Wonderful Economics?

Poor in the past

Has Excellent and Trustworthy Management?

Remains to se seen

Likely to grow earnings per share at an attractive rate over the next decade?

Uncertain

Positive near-term earnings outlook?

Unclear

Valuation?

Unknown

SUMMARY AND RATING:  We have not graphed the past earnings at this time but be aware that this company has a recent string of large annual losses. Q2 2020 was the first profitable quarter in recent history and profits continued in Q3 and Q4. The Value ratios are inconclusive and cannot be said to support a rating of Buy. Newer management has taken over since 2018 and appears to be far superior to the previous management but their ability to maintain the recent profitability remains to be seen. The insider trading signal is neutral due to a lack of recent activity. The near-term outlook is strong for Q1 as the pandemic has substantially boosted same-store liquor sales but it will face “tough comparables” thereafter especially as restaurants and bars reopen. Results on the Cannabis side are uncertain but should be positive. The economics of the business have been poor but may be reasonably good going forward. This is now a speculative investment with some uncertainty.  We rate this investment a (lower) Sell at $7.83.

LONG TERM VALUE CREATION: For about the past decade, this company has been a significant destroyer of value. This is evidenced by its negative retained earnings which exceed its current equity level. It is also evidenced by a huge share price decline over the past eight years. This situation has however improved greatly during 2020.

DESCRIPTION OF BUSINESS: Alcanna is primarily an Alberta retail liquor store operator that has more recently moved into Cannabis retailing in Alberta and Ontario under the Nova Cannabis and Value Bud brands. It has 173 retail liquor stores in Alberta (with a heavier presence in Edmonton than Calgary) (23 stores in B.C. have been sold although the deal has not yet closed). Eight of the Alberta stores are very large “destination” stores under the Wine and Beyond banner. Most of its stores are described as discount and/or convenience locations (serving the nearby and drive-by population as opposed to drawing in customers from other neighbourhoods). It has 53 Cannabis stores with 51 in Alberta and plans to open 2 to 4 more soon. It has just one Ontario Cannabis store but plans to open as many as seven more in the coming months. The Cannabis stores are owned in a separately-trading subsidiary which they own 63% of.

ECONOMICS OF THE BUSINESS: This remains to be seen. The Company has had a history of significant losses in recent years but turned profitable in the latest three quarters (Q2, Q3 and Q4, 2020).

RISKS: See annual report for risks. The (hopefully pending) eventual end of the pandemic situation will likely lead to a contraction of retail liquor sales from present abnormally high levels. Changes in government regulations and licencing requirements are a risk. Inventory loss due to theft is a risk.

INSIDER TRADING / INSIDER HOLDING: (Based on September 1, 2020 to March 28, 2021) The only insider trade was an executive purchased 25,000 shares at $4.28 back in September to hold 339,400 shares. Given the lack of transactions and the current price of $7.83, there is no insider trading signal.

WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is  simple to understand and predict (marginal pass – it is a relatively simple business), has favorable long-term economics due to cost advantages or superior brand power (marginal pass at best because it faces stiff competition from some competitors including Costco and Superstore also all retailers pay the same price from the government wholesalers no matter their scale), apparently able and trustworthy management (pass for current newer management), a sensible price – below its intrinsic value (not clear), Other criteria that have been attributed to Buffett include: a low  debt ratio (pass), good recent profit history (pass although based on just the latest three) little chance of permanent loss of the investors capital (marginal pass) a low level of maintenance type capital spending required to maintain existing operations excluding growth (marginal pass)

MOST RECENT EARNINGS AND SALES TREND: After several years of losses, the company was reasonably profitable from continuing operations in Q2 2020 and again in Q3 and in Q4. While a clear trend and earnings level has not yet been demonstrated it appears likely that the company will now continue to be profitable. The company also made substantial unusual gains from selling stores in 2020 but this is not representative of ongoing earnings.

COMPARABLE STORE SALES  OR INDUSTRY SPECIFIC STATISTICS: Same-store liquor sales were up 7.6% in Q4 (would have been stronger but there were bans on in-home gatherings) and up 14.7% in Q3 2020 and up by 13.4% in  Q2 2020 driven by consumer behavior changes brought on by the pandemic. In Q1 2020 same-store liquor sales were up by 10.7% driven up by stock piling in March brought on by the pandemic.

Earnings Growth Scenario and Justifiable P/E: There is insufficient reliable recent history of earnings to calculate a P/E ratio. This is changing rapidly however as they have now posted three profitable quarters (from continuing operations) and upcoming quarters should be profitable as well.

VALUE RATIOS: There is not much to go on in terms of value ratios. There is no dividend. The price to book value ratio appears reasonable at 2.45 but the reliability of the book value is uncertain given the large impact of capitalized lease assets and liabilities. Until the latest three quarters, which were profitable on both a GAAP and continuing operations basis, the  company had reported a lengthy string of losses and so the trailing P/E ratio is very high. The analyst forward P/E is not attractive at 27. Overall, the value ratios are inconclusive and cannot be said to support a Buy rating.

SUPPORTING RESEARCH AND ANALYSIS

Symbol and Exchange:

CLIQ, Toronto

Currency:

$ Canadian

Contact:

0

Web-site:

0

INCOME AND PRICE / EARNINGS RATIO ANALYSIS

Latest four quarters annual sales $ millions:

$824.4

Latest four quarters annual earnings $ millions:

$68.3

P/E ratio based on latest four quarters earnings:

4.6

Latest four quarters annual earnings, adjusted, $ millions:

$2.3

BASIS OR SOURCE OF ADJUSTED EARNINGS: No adjustment for Q3 2020. In Q4 and Q2, 2020, used pre-tax profit from continuing operations less a normalized tax rate of 25%.

Quality of Earnings Measurement and Persistence: The company appears to be coming out of a period of losses. The quality of earnings measurement and persistence has to be considered low but is improving..

P/E ratio based on latest four quarters earnings, adjusted

135.7

Latest fiscal year annual earnings:

$68.1

P/E ratio based on latest fiscal year earnings:

4.6

Fiscal earnings adjusted:

$(1.3)

P/E ratio for fiscal earnings adjusted:

negative

Latest four quarters profit as percent of sales

0.3%

Dividend Yield:

0.0%

Price / Sales Ratio

0.38

BALANCE SHEET ITEMS

Price to (diluted) book value ratio:

2.45

Balance Sheet: Updated Q2, 2020: Assets are 42% capitalized leases, 22% inventory, 19% property and equipment 1 percentage point of which is software, 5% the intangible investment in licenses, 3% goodwill, 2% deferred tax assets, 2% prepaid expenses and deposits, 2% receivables and 2% cash. These assets are financed as follows: 59% by capitalized lease liabilities (which significantly exceeds the lease assets and therefore indicates the leases are at above market rates?) 16% by debt, 6% by accounts receivable and 19% by common equity. This may be a reasonably strong balance sheet given that they equity exceeds the debt and given that the value of goodwill and intangible licenses total only 8% of assets.

Quality of Net Assets (Book Equity Value) Measurement: Lower quality due to the large amount of capitalized lease assets and lease liabilities.

Number of Diluted common shares in millions:

                                 40.6

Controlling Shareholder: There is no controlling shareholder.

Market Equity Capitalization (Value) $ millions:

$318.1

Percentage of assets supported by common equity: (remainder is debt or other liabilities)

26.6%

Interest-bearing debt as a percentage of common equity

59%

Current assets / current liabilities:

3.2

Liquidity and capital structure: The liquidity and capital structure appear to be very good with relatively modest debt levels and ample cash.

RETURN ON EQUITY AND ON MARKET VALUE

Latest four quarters adjusted (if applicable) net income return on average equity:

2.3%

Latest fiscal year adjusted (if applicable) net income return on average equity:

-1.3%

Adjusted (if applicable) latest four quarters return on market capitalization:

0.7%

GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE

X years compounded growth in sales/share

not available

Volatility of sales growth per share:

 $                                  –  

X Years compounded growth in earnings/share

not available

X years compounded growth in adjusted earnings per share

not available

Volatility of earnings growth:

 $                                  –  

Projected current year earnings $millions:

not available

Management projected price to earnings ratio:

not available

Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in (adjusted)  earnings per share?

No!

Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained:

-1.3%

More conservative estimate of compounded growth in earnings per share over the forecast period:

5.0%

More optimistic estimate of compounded growth in earnings per share over the forecast period:

10.0%

OUTLOOK FOR BUSINESS: This current Q1 ending March 31 should be relatively strong with same store sales of about 8% forecast by the company. Beginning in Q2 the company will be lapping the quarters where the pandemic increased its sales and as things open up it my have a difficult time even matching those sales. Cannabis sales should benefit from added locations. It’s possible that a dividend could be introduced although there has been no indication of this.

LONG TERM PREDICTABILITY: Alcanna has a poor history and while it now appears to be on a much better course its future has to be considered uncertain particularly in regard to the new and evolving Cannabis retail industry.

Estimated present value per share: The company has had a history of losses and we have no basis to make a valuation calculation based on earnings. Future earnings (or possibly losses) remain very uncertain despite a profit in the latest three quarters (Q2 through Q4 2020).

ADDITIONAL COMMENTS

INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition based on the following four tests. Barriers to entry (marginal pass due to licencing requirements). No issues with powerful suppliers (fail since the government is the sole supplier and can usurp profits). No issues with dependence on powerful customers (pass), No potential for substitute products (pass although the illegal market is a substitute for Cannabis) No tendency to compete ruinously on price (marginal pass, as price competition can be severe). Overall this industry appears to be marginally attractive at best even for a large established incumbent.

COMPETITIVE ADVANTAGE: Alcanna’s advantage in the Alberta liquor market lies in its scale and multitude of locations. There are no quantity discounts from the government wholesaler but as a larger chain it can take advantage of limited-time sales from liquor producers to stock up at lower prices. Alcanna, however, would have a higher cost structure than Superstore and Costco.

COMPETITIVE POSITION: The retail liquor business in Alberta is highly fragmented. Alcanna is the largest chain but it still represents only about 10% of the market. Strong competitors include Costco and Superstore which of course have relatively few stores but offer low prices and do high volumes. In Alberta the Cannabis market is also highly fragmented and Alcanna with 30 licenses has only 7% of the licenses. It has entered the Ontario Cannabis market with one initial store but plans to expand rapidly.

RECENT EVENTS: This company has made many significant changes in the recent past. In 2019 acquired 28 stores of the former 64 store Solo liquor chain which went into bankruptcy / receivership. In a series of transactions starting in November 2018 and through January 2020 acquired the Ace liquor store chain and also acquired some senior management talent in that transaction. Most of its existing stores have been refreshed / renovated. On June 1, 2020 the company disposed its 21 Alaska liquor stores at a gain of $13.7 million dollars (somehow $23.7 net of income tax benefits) . In October 2019 closed its one store in Connecticut. Earlier it had sold its stores in Kentucky. It now has no U.S. operations. In the Alberta liquor store business it purchased two chains of competitor stores, rebranded stores and closed some stores. It entered the Cannabis retail store market in 2019. In October 2020 it sold 8 stores on Vancouver island at a gain of $15.0 million. The remaining B.C. stores have also been sold although the transaction has not yet closed.

ACCOUNTING AND DISCLOSURE ISSUES: There are a number of accounting issues that lower the reliability of the reported earnings. This includes a negative tax rate as of 2019 and 2020 due to past losses. The reliability of the book value per share is also suspect due to the huge estimated figure for capitalized lease assets and liabilities.

COMMON SHARE STRUCTURE USED: Normal, one vote per share.

MANAGEMENT QUALITY: Current management appears to be of good quality while previous management (notably Stephen Bevis) had been very poor for probably the past decade or so.

Capital Allocation Skills: Historically poor as evidenced by a history of losses. Current management may be making good capital; allocation choices however.

EXECUTIVE COMPENSATION: Compensation for the named officers in 2019 ranged from $300k to 890k and could be considered generous given the lack of profits in 2019. However, this is not necessarily a concern as profits emerged in 2020.

BOARD OF DIRECTORS: Warren Buffett has suggested that ideal Board members be owner-oriented, business-savvy, interested and financially independent. The Board here appears to be well qualified with substantial experience.

Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed  analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry.

DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice.

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