Glass Home Manufacturers: Price Retaining An Eye On (OTCMKTS:GLASF)

Thesis

I’ve been researching hashish corporations for the reason that industry-wide rally in early 2021. With a lot of the {industry} unable to seek out optimistic money movement by means of the 280e tax obligation, a majority of the operators in the US have been unable to seek out optimistic money movement or web earnings.

Glass Home Manufacturers Inc. (OTC:GLASF) has been growing its income and gross income. They’ve managed to seek out optimistic money movement for the final three quarters, and got here near optimistic web earnings this most up-to-date quarter. This distinguishes them as one of many few hashish corporations in the US which seem like investible. After wanting over their financials and valuation, I presently price Glass Home as a Maintain.

Firm Background

Glass Home is a vertically built-in hashish firm which operates in California. They preserve 6 massive greenhouses with a total of 5.5M sq.ft. of cultivation footprint. Along with promoting wholesale, additionally they preserve 10 retail storefronts. They had been based in 2015 and are headquartered in Lengthy Seaside, California.

Lengthy-Time period Tendencies

The California authorized hashish market is predicted to develop at CAGR of 12.2% by means of 2030. The US hashish {industry} is predicted to expertise a CAGR of 14.2% till 2030.

Steering

Their most up-to-date earnings call transcript signifies that they imagine the DEA could make an announcement about rescheduling earlier than the top of the yr.

They’re working below the framework that strain to reschedule will rise main into the 2024 presidential election.

They’re additionally anticipating that public sentiment will encourage interstate commerce.

Their income from biomass has risen considerably over the past yr.

They imagine they’ll be capable to notice extra price effectivity enhancements.

Wholesale gross margins fell by 1% to 60%, and retail gross margins elevated 2% to 56%.

They attribute a majority of their Adjusted EBITDA enhancements to greater quantity of wholesale biomass.

Their money stability had elevated to $37.9M on the finish of the quarter. Their most popular fairness increase produced $10.9M in inflows from the primary spherical. They’ve acquired an extra $1.9M from the second, with one other $1.6M of inflows within the time between the quarters finish and the earnings name. They count on to achieve an extra $0.6M, and for the full quantity raised from most popular fairness to finish up at $15M.

The variety of lively cultivation licenses in California has been in decline. They count on that the tempo of decline will sluggish.

Whole market gross sales in California fell 11% in contrast the third quarter of final yr. Flower declined 15%, pre-rolls fell 1%, and the vape market fell 10%.

They challenge that their This autumn income to come back in decrease subsequent quarter, ending up between $38M and $40M. Whereas decrease than this quarter, their projected This autumn income continues to be 21% greater than the earlier This autumn. With the decrease projected income for This autumn and estimated $5M in taxes, they count on to have between -$2M and $5M in working money movement and an Adjusted EBITDA between $5M and $7M.

They nonetheless count on for the enlargement of Greenhouse 5 to remain on schedule and to have it operational in time to make their first gross sales from its manufacturing in Q2, 2024.

Quarterly Financials

Their quarterly financials are displaying income development has been outpacing price of income. Eight quarters in the past, Glass Home had a quarterly income of $17.2M. 4 quarters in the past, that had grown to $28.3M. By this most up-to-date quarter, that had risen additional to $48.2M. This represents a complete two-year enhance of 180.23% at a mean quarterly price of twenty-two.53%.

Their gross margins are considerably higher than they had been in late 2021 and early 2022. Each working and EBITDA margins have been optimistic for the final two quarters. As of the newest quarter, gross margins had been 53.94%, EBITDA margins had been 17.84%, working margins had been 10.17%, and web margins had been at -0.62%.

Wanting solely at widespread shares excellent, their tempo of dilution seems to have slowed. The sum of their final eight quarters of dilution involves 21.92%; over the past 4 quarters this has dropped to five.47%.

This most up-to-date quarter, Glass Home had -$2.2M in web curiosity expense, complete debt was at $75.3M, and long-term debt was at $63.9M.

Their money flows have been optimistic for the primary three quarters of 2023. As of the newest earnings report, money and equivalents had been $35M, quarterly working earnings was $5M, EBITDA was $8.6M, web earnings was -$0.3M, unlevered free money movement was $8.7M, and levered free money movement was $7.6M.

Except for a drop in mid-2022, complete fairness has been rising since Q2 of 2021.

As of the newest earnings report, ROIC was -0.12%, ROCE was 1.48%, and ROE was -0.18%.

Publish-Rescheduling

Their web margins ought to enhance considerably as soon as hashish is rescheduled. By including their earnings tax expense to their web earnings, after which subtracting a 21% company earnings tax from that sum, I can produce tough estimates for his or her post-rescheduling web margins. In the event that they weren’t currently operating under 280e, they’d have posted a web margin of about 10.17% this most up-to-date quarter.

Valuation

As of December eighth, 2023, Glass Home had a market capitalization of $324.42M and traded for $4.58 per share. With a ahead EV/EBITDA of 16.4x, and a Value/Money Circulation of 26.03x, I view the corporate as presently overvalued.

Dangers

Glass Home makes use of massive greenhouses to provide their hashish. Whereas this offers them important management over watering and humidity management, they’re nonetheless topic to issues from prolonged durations of cloud cowl.

Catalysts

The complete {industry} faces potential catalysts from each rescheduling and the passage of some type of the SAFE Banking Act. In response to Biden’s request to assessment the scheduling of hashish, the DHHS has already concluded it needs to be moved to schedule 3, however the Federal authorities continues to be ready on the findings of the DEA earlier than the method can proceed.

If the effectivity enhancements the corporate believes are doable are realized, it ought to result in extra enticing margins and returns. If these enhancements are sustained, then this could result in valuation enhancements.

Conclusions

General, Glass Home seems to be one of many extra enticing potential hashish investments. They’ve been rising income, and are working towards bringing extra manufacturing capability on-line. With their valuations already relatively excessive, and their projection that income will likely be decrease subsequent quarter, I’m hesitant at hand out a Purchase score till we get subsequent quarter’s outcomes and steering. I believe the extra manufacturing capability they count on to start coming on-line Q2, 2024 will enable their already enticing gross margins to drag gross revenue greater. If the income enhancements are important sufficient, and gross margins are maintained at a gorgeous degree, this may occasionally go away the corporate with excessive sufficient gross revenue to beat their bills.

Whereas I’m presently inserting a Maintain score on them proper now, I imagine this firm is price watching. When rescheduling arrives, I count on that Glass Home will participate within the industry-wide rally. Even when rescheduling is delayed considerably, Glass Home has positioned itself right into a state of affairs the place they’ll count on to have bettering financials sooner or later. If their financials enhance by sufficient in future quarters, I’ll change my advice to a Purchase score.

Editor’s Notice: This text discusses a number of securities that don’t commerce on a serious U.S. change. Please concentrate on the dangers related to these shares.