The selloff on Rubicon Organics (Rubicon Organics Stock Quote, Chart, News, Analysts, Financials TSXV:ROMJ) appears to have gone too far, according to Greg McLeish, analyst for Research Capital. McLeish reviewed the latest quarterly numbers from the company in client report on Wednesday and upgraded his rating from “Hold” to “Buy” while maintaining his $3.50 target price.
Delta, BC-based Rubicon Organics is a Canadian organic-certified licensed cannabis producer solely focused on ‘super-premium’ cannabis and currently one of just six LPs in the country offering certified organic products and one of only two such companies to produce for the adult and medical use markets. Rubicon also has supply agreements with six Canadian provinces.
The company announced its first quarter 2021 financials on Tuesday, showing $4.1 million in net revenue compared to $3.7 million a year earlier and an adjusted EBITDA loss of $3.4 million compared to a loss of $3.0 million a year earlier. Management said the uptick in revenue came from an increased product offering including new brands and expanded distribution channels across the country. At the same time, revenue was down sequentially from Q4 2020’s $4.8 million, with Rubicon saying the drop was down to provincial restrictions on retail store openings related to the pandemic. At the end of the quarter, the company had cash and equivalents of $20.2 million.
Rubicon said its Simply Bare Organics line maintained significant market share in the premium and organic product categories over the first quarter, holding a top-six position in premium in Ontario, Alberta and Quebec and the top position in premium in BC.
Looking ahead, the company said COVID-19-related store closures will continue to impact Rubicon’s ability to achieve its earnings and cash flow targets for the second quarter, pushing those milestones to the third quarter, subject to further impacts.
Rubicon said it has taken the proactive measure related to store re-openings of undergoing a company-wide restructuring, one which has already generated annualized savings of $2.6 million. The company further said it expects revenue to pick up in its premium flower and cannabis 2.0 products categories via an accelerated launch of additional products and brands over upcoming months.
“Rubicon Organics has maintained its market share leadership position in the organic cannabis segment and remains a top selling premium brand in all major Canadian provinces. We remain focused on superior product quality and we have rapidly implemented efficiencies to our production process that position us to maximize our profitability,” said CEO Jesse McConnell in a press release.
Looking at the quarterly numbers, McLeish said he had estimated $4.9 million in revenue and an adjusted EBITDA loss of $407,000 compared to the realized $4.1 million and negative $3.4 million, respectively.
Over the quarter, Rubicon wrote off $908,948 of non-cash fair value in cannabis inventory with McLeish explaining that the company had increased its finished packaged goods inventory for the Q1 in expectation of higher demand (which was the case in 2020), but COVID lockdowns during the first quarter translated into lower sales and thus the aging of some of that inventory, making them sub-standard, according to Rubicon and thus written off.
McLeish further wrote that de-stocking events by provincial distributors in Ontario and Alberta were impacting Rubicon’s near-term revenue opportunities.
“In our last note (April 7, 2021) we highlighted that we were becoming increasingly concerned with cannabis companies overestimating near term revenue potential,” McLeish wrote. “Through the winter and first quarter of 2021 in Canada, [Rubicon management] highlighted that the company experienced a significant decrease in orders from the provincial distributors in Ontario and Alberta relative to forecast. This decrease from forecast was particularly noteworthy where store closures were in effect or stores were limited to ‘click and collect’ shopping.”
“In addition, there has been inventory de-stocking events at provincial distributors impacting total short-term market demand and lower first-time purchases of new product innovation by the distributors. These factors have impacted Rubicon’s ability to achieve its previously disclosed adjusted EBITDA and operating cash flow targets in Q2/21. The company’s current expectation for the achievement of such milestones has been delayed to Q3/21,” McLeish said.
The analyst said Rubicon is refocusing on new product innovation as a revenue driver, pointing to the company’s announcement in March of a services agreement with the Valens Company to provide organic-certified extraction services, a move which McLeish said is expected to accelerate the launch of Rubicon’s 2.0 innovation pipeline.
Looking ahead, McLeish is expected ROMJ to generate full 2021 and 2022 net revenue of $27.4 million and $52.8 million, respectively, and 2021 and 2022 EBITDA of negative $2.1 million and $15.3 million, respectively. At the time of publication, McLeish’s $3.50 target represented a projected one-year return of 25 per cent.
ROMJ was almost a double in 2020, returning 97 per cent, while so far in 2021 the stock is down 26 per cent.