Sundial Growers is a wait and see stock: ATB Capital

ATB Capital Markets analyst David Kideckel says Canadian cannabis company Sundial Growers (Sundial Growers Stock Quote, Chart, News NASDAQ:SNDL) has been flying under the radar, but in a coverage launch on Thursday, Kideckel gave the stock a “Sector Perform” rating, saying there needs to be more visibility on the company’s profitability path.

Calgary-based Sundial, which went public in August 2020 with a listing on the NASDAQ exchange, has an indoor facility in Olds, Alberta, and focuses on the premium inhalables market through a craft-at-scale individualized room approach, bringing out dried flower, pre-rolls and vapes.

Currently, Sundial has supply agreements with nine Canadian provinces and a distribution network covering 98 per cent of the Canadian rec cannabis industry. Sundial made a commitment earlier this year to focus on its core operations in Canada when it sold its Bridge Farm asset in the UK, acquired in 2019 in effort to expand the company’s business to CBD sales in the UK.

In his coverage initiation, Kideckel said Sundial’s track record of Canadian rec sales is impressive, estimating that Sundial is among the top ten LPs in terms of rec cannabis gross sales and among the top five LPs in terms of vape sales in Ontario, Alberta and BC. Kideckel noted that over the second quarter 2020, Sundial increased its rec market share from 3.0 per cent in Q1 to 4.5 per cent.

“Sustainable market share is a critical factor in determining whether an LP will succeed over the long term in Canada. To date, Sundial has executed well on that metric,” Kideckel wrote.

“Our view on Sundial is driven by the following factors: 1) large addressable market; 2) track record of gaining market share in Canada; 3) scope to improve profitability leading to positive free cash flow; and 4) attractive valuation relative to peers. However, we remain neutral on the stock as we need more visibility on the Company’s ability to improve profitability given the near-term headwinds affecting the Canadian cannabis industry,” Kideckel wrote.

“If Sundial maintains or improves its market share and achieves positive free cash flow, we believe there is significant room for valuation multiple expansion,” he said.

On the numbers, the analyst estimates Sundial will deliver fiscal 2020 (year end December 31) revenue and adjusted EBITDA of $84 million and negative $40 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $91 million and $11 million, respectively.

On the still-young sector as a whole, Kideckel remarked that Canadian cannabis has been a volatile space over recent quarters, with most licensed producers impacted by supply chain inefficiencies, increased competition and regulatory bottlenecks, not to mention the uncertainties raised by the COVID-19 pandemic.

All that’s to say that Kideckel approves of Sundial’s strategy to confine itself to the Canadian market and specifically the premium inhalable segment.

For potential catalysts, Kideckel referred to sustaining or improving market share over the next few quarters, improving profitability to achieve positive free cash flow and positive developments in the overall Canadian regulatory framework.

Kideckel’s “Sector Perform” rating was paired with a one-year target of US$0.40, which as of publication date represented a projected return of 111 per cent. (All figures in Canadian dollars except where noted otherwise.)