Sundial Growers wins price target raise at ATB Capital

Following a strategic shift, David M. Kideckel of ATB Capital Markets has revised his viewpoint on Canadian cannabis company Sundial Growers (Sundial Growers Stock Quote, Chart, News NASDAQ:SNDL), changing his rating from Underperform to Sector Perform, and raising his target price to $0.80/share from $0.50/share, with a predicted total return of 6 per cent. The report, issued Tuesday, outlines what the analyst belies is a brand-new company.

The move comes after the Calgary-based organization, which focuses on the premium inhalables market through a craft-at-scale individualized room approach, acquired Inner Spirit Holdings for consideration per Inner Spirit Share consisting of $0.30 in cash and 0.0835 of a common share of Sundial.
The acquisition positions Sundial, which has operations in Olds and Rocky View County in Alberta, as one of Canada’s biggest vertically-integrated cannabis companies, and the pivot has Kideckel more optimistic about the company’s fundamental outlook.

“In our view, Sundial is a very different business from a year ago, and the rise of a new Sundial led by (chief executive officer) Zach George and team could present an attractive opportunity for investors,” he said.

The acquisition has led to a significant change in ATB’s estimates for Sundial with immediate effect. A dramatic increase in forecasted revenues in Q3 and Q4 leads to a revised overall 2021 revenue projection of $64.5 million compared to the original $59.9 million estimate, with the gross margin forecast to drop to 14.5 per cent from its original 29.4 per cent, with a projected EBITDA of -$22.9 million.

For 2022, ATB forecasts revenue of $103.7 million for Sundial, more than 50 per cent above the original estimate of $66.8 million on an adjusted gross margin of 33.9 per cent compared to the original 28 per cent forecast, with a projected EBITDA of $4.8 million, significantly higher than the initial $200,000 forecast.

Inner Spirit Holdings features the Spiritleaf cannabis network, which was the first Canadian cannabis company to be granted Canadian Franchise Association membership, and has since grown into the country’s largest single-brand recreational cannabis retailer with 100-plus stores across six provinces.

“We believe that by owning a large store network Sundial could gain better and real-time insights into consumer preferences, as well as obtain privileged shelf space and improved distribution for its own line of products,” Kideckel said. “We view Sundial’s retail operations as supporting an improved growth outlook for the Company’s recreational cannabis sales.”

George, who took over as the company’s CEO in January 2020, is keen to leverage and integrate the Spiritleaf brand into Sundial operations.

“The acquisition of the Spiritleaf cannabis retail network makes Sundial a stronger and more diverse cannabis company,” he said in the company’s July 20 press release. “We are excited to work with the Spiritleaf team and franchise partners to further develop and optimize the store network in Canada and provide a clear path to sustainable profitability for Sundial. Spiritleaf has demonstrated the ability to grow its brand from coast to coast, and we plan to support this growth trajectory, enhance the use of data to make key business decisions, and provide an optimal product assortment to meet the diverse needs of Canadian cannabis consumers.”

In addition to acquiring Inner Spirit, Sundial also contributed an additional $350 million to SunStream, a joint venture between Sundial and the SAF Group that leverages a strategic financial and operational partnership to target asymmetrically enhanced risk-return opportunities in the cannabis industry.
However, even with the more optimistic targets in place and a quarterly update expected in August, Kideckel notes that a Sundial investment does still possess numerous risk factors including increased competition with hundreds of cultivation licenses in Canada, litigation and recall, operational risk, financing and modelling risks, potential for the growth rate to be different from expectations, and the ongoing COVID-19 pandemic.

Though the risks are very much in play, Kideckel foresees Sundial potentially becoming a more attractive investment opportunity.

“In our view, the diversification presented by Sundial’s vertically-integrated cannabis core operations, investments, and large cash balance, reduces downside risk and increases upside potential as management looks to deploy capital in the cannabis industry, including internationally (e.g. the US),” he said. “We view management’s renewed approach to cannabis to be strategic, efficient and visionary.”

At the time of publication, Sundial Growers was trading at $0.88/share on NASDAQ, up four cents from its Wednesday opening.