Sundial Growers Looking Bullish As Revenue Growth From Acquisitions Increases

May 19, 2022 12:34 PM ETSNDL Inc. (SNDL)VFF, VLNS, VLNS:CA12 Comments4 Likes
Alan Sumler profile picture
Alan Sumler
917 Followers

Summary

  • Sundial Growers reported Q1-2022 revenue of CA$17.6 million, representing a 78% increase YoY.
  • The company’s numbers do not yet include the Alcanna and Nova Cannabis acquisitions.
  • Alcanna’s Q1-2022 revenue, not included in Sundial’s revenue report, was CA$162.5 million.
  • Sundial Growers is currently undervalued, and its stock has begun a new uptrend.
  • I am now rating Sundial Growers as a Buy and recommend a long-term strategy.

Bush of cannabis

Riccardo_Mojana/iStock via Getty Images

Sundial Growers (NASDAQ:SNDL) released it Q1-2022 report earlier this week. Although the company’s revenue numbers do not include Alcanna and Nova Cannabis yet, the company includes the two company’s Q1-2022 revenue and margin numbers. Sundial will include these numbers on future reports, and the company’s revenue numbers will increase above CA$100 million.

Sundial lists its current book value at USD$1.3 billion, or USD$0.53 per share. The stock currently trades around USD$0.42 per share. The company is valued 1.31x NTM Total EV divided by Revenues. Currently, market volatility will continue to affect Sundial’s stock price. Regardless, I rate Sundial Growers as a Buy, while it trades at this discount. If the stock price moves up to its book value, it represents over 20% upside potential.

Q1-2022 Report Shows Increasing Revenues Before The Addition Of Alcanna And Nova Cannabis

The company reported Q1-2022 net revenue of CA$17.6 million, representing a 78% increase YoY. Revenue included one day’s worth of sales for Alcanna (CA$1.3 million) and Nova Cannabis (CA$0.7 million). Sundial’s gross margin was CA$3.4 million, representing a 199% increase YoY.

For cannabis cultivation, Sundial reported an improved gross margin and achieves a lower cost per gram production. Margin was negative CA$0.2 million compared to negative CA$3.5 million YoY. Revenue from branded cannabis products was CA$9.7 million, an increase of 8% YoY. Total revenue from cannabis cultivation and production was CA$11.3 million, a decrease of 3% YoY. The decrease was due to a decrease in wholesale sales.

Cannabis retail revenue was CA$7.5 million, with a gross margin of CA$3.3 million. The current Spiritleaf store count is 103 with 20 corporate and 83 franchised stores. System-wide retail sales were CA$34.6 million (includes franchise store sales and not part of Sundial’s revenue report).

The company reports cannabis revenues per category: Dried flower, CA$8.853 million; Vapes CA$0.531 million; Oil $CA0.27 million; Edibles and Concentrates CA$1.536 million; Services CA$0.358 million.

Sundial had deployed a total of CA$650 million in cannabis related investment capital, of which CA$453 million went to SunStream Bancorp. The company reports for Q1-2022 revenues from interest and fees of CA$3.9 million and profit share from SunStream of CA$4.1 million. The company lost CA$17.7 million from strategic investments in Village Farms (VFF) and the Valens Company (VLNS). Overall loss from investment activities was CA$9.758 million.

Net loss has improved 72%, with the company reporting CA$38 million compared to CA$134.4 million YoY. The company reports cash, marketable securities, and long-term investments of CA$1.0 billion. Sundial remains debt free. The company shows CA$361 million in unrestricted cash as of May. Total assets amount to CA$1.996 billion.

Revenue Numbers For Alcanna And Nova Cannabis Not Included In Q1-2022

The Alcanna and Nova Cannabis acquisitions are now complete. Sundial bills itself as the largest private sector distributor of liquor and cannabis in Canada, with a total of 354 retail locations. Alcanna’s Q1-2022 revenue was CA$162.5 million, which is not yet included in Sundial’s revenue. The company’s gross margin was CA$36.3 million.

The revenue comes from liquor sales and cannabis sales, via Nova Cannabis. Gross revenue for Ace Liquor, Wine and Beyond, and Liquor Depot was CA$114.7 million with a gross margin of CA$27.3 million. Nova Cannabis Q1-2022 revenue was CA$49.8 million with a gross margin of CA$9.4 million.

Nova Cannabis operates 80 stores. During the quarter, the company opened 6 new Value Buds stores and plans 12 new stores for the remainder of the year.

Sundial’s Stock Price Is Down 28% YTD And 47.60% Over 12-Months

Chart, histogram Description automatically generated

Stock Charts

YTD price performance chart from www.StockCharts.com

Current market volatility and a continued bearish sentiment towards cannabis stocks has brought down Sundial’s shares 47.6% over the last 12-months and over 28% YTD. The stock price had a recent rally, putting its 5-day performance at a 12% gain. The stock price rallied back in March near USD$0.90 per share and nearly broke USD$0.50 per share this week.

Sundial announced that it is restarting its stock repurchase program as of May 18th. It is yet to be seen if the stock price continues this new uptrend. The price hit its 52-week low last week on May 12th dropping to USD$0.34 per share and is now seeking higher ground at around USD$0.42 per share.

Risk And Investment Thesis

Sundial has low to no risk to liquidity. The larger risk is in any pull-back in demand in the Canadian cannabis and liquor markets, which would negatively affect the revenue and margins. Inflation and the fed rate hike remain risks for all stocks, including Sundial. A change in larger economic conditions will change buyer habits and the amount of money buyers have to spend. Lower revenues are a general concern for all retail stocks. So far, Sundial has done well to navigate the rapidly changing Canadian cannabis market. The company promises to focus on its large pool of customer buying habits from its entire retail network in an attempt to make business more efficient and profitable.

The thesis behind a Buy signal for Sundial concerns its current valuation, current stock price, and future valuation. The company’s book value is USD$0.52 per share, and the stock price is trading under this value. The company has a forward multiple of 1.31x NTM Total EV divided by Revenues, which also indicates that the stock price is undervalued. Sundial will show at least an additional CA$100 million in revenue when it releases a quarterly statement this year containing revenues from Alcanna and Nova.

It is yet to be seen how combined operating costs will affect Sundial’s net income or loss. Since the stock price has recently hit its 52-week low and seeing how the company will experience growth over the next 12-months, I rate the company as a Buy. There is, of course, still the issue of larger market volatility and the current bearish sentiment towards cannabis stocks. This sentiment may be on the brink of changing, regardless of US federal legalization.

Conclusion

Sundial Growers presents a renewed investment opportunity after its recent acquisitions of Spiritleaf, Alcanna, and Nova Cannabis. Revenues have increased and will continue to do so for the company. Sundial now considers itself to have four operating segments: cannabis cultivation and production, cannabis retail sales, liquor retail sales, cannabis investments. The company is currently undervalued based on its book value, its forward multiplier, and its recent stock price hitting its 52-week low. Since Sundial is trading at a discount, I rate the company has a buy and recommend consideration of a long-term strategy.

This article was written by

Alan Sumler profile picture
917 Followers
Welcome to the home of The Cannabis Report: a monthly report on the cannabis industry. I am an analyst and consultant in the cannabis industry. I have contributed to High Times Magazine. I currently have a book out, Cannabis in the Ancient Greek and Roman World. I am most interested in technical stock analysis, option strategies, small cap strategies, and emerging markets. Feel free to contact me with any questions about the cannabis industry or publicly traded stocks in the cannabis industry.
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Disclosure: I/we have a beneficial long position in the shares of SNDL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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