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Decibel Cannabis punches above its weight, says Raymond James

Raymond James analyst Rahul Sarugaser believes Decibel Cannabis (Decibel Cannabis Stock Quote, Chart, News, Analysts, Financials TSXV:DB) is ready to make some noise in the cannabis market, initiating coverage with a rating of “Outperform 2” and target share price of $1.00/share for a 212.5 per cent projected return in an update to his clients on Thursday.

Headquartered in Calgary, Alberta, Decibel Cannabis is an agro-based company that has three facilities for producing premium, craft cannabis: the company’s Qwest estate in Creston, BC, a Thunderchild cultivation facility in Saskatchewan and a 15,000-square foot extraction facility called The Plant in Calgary.

The result of a merger between Westleaf Labs and We Grow BC in December 2019, Sarugaser said Decibel Cannabis has progressed as it positions itself as a top-10 licensed producer in the Canadian adult-use cannabis market, all while expanding its market capitalization from $20 million in December 2020 to $110 million at press time.

“Analyzing our channel data during the last 12 months, we watched in awe as DB quickly gobbled up market share in the premium cannabis flower, vape, and loose concentrates categories, forcing us to pay attention,” Sarugaser noted in his report. “Upon closer inspection, we discovered that DB is a brand-driven collection of craft cannabis pros; DB’s capacity to build sought-after brands—the Qwest premium family of brands, General Admission mid-market brand—of uncompromisingly high-quality cannabis is jettisoning this group to the top of the Canadian cannabis pecking order.”

Decibel recently reported its second quarter financial results, reporting net revenue of $12.4 million for the second quarter with a 41 per cent gross margin, a 111 per cent year-over-year increase in revenue, though it also represented a 1 per cent quarter-to-quarter decrease. Strong product sales across a number of categories were offset by stock-outs totalling seven weeks in the quarter, while supply chain disruptions on account of COVID-19 and in-store shopping closures in Ontario also contributed to the quarterly drop.

Derivative sales accounted for $5.7 million in net sales for the quarter, while retail sales brought in $3.2 million in net sales, and also sold 449 kilograms of flowers at an average of $7.96 per gram.

The company reported its fourth consecutive quarter with positive adjusted EBITDA at a record $2.1 million, giving it $6.1 million in adjusted EBITDA over the last 12 months.

“Decibel’s tremendous first half results are a testament to the strength of our brands, ability to innovate and our exceptional team”, said Paul Wilson, CEO of Decibel in the company’s August 16 press release. “We continue to build a solid foundation by creating meaningful brands, high quality products and executing against our aggressive strategic plan.”

Sarugaser predicts continued growth in his initial financial estimations and valuations, projecting a solid second half of 2021 ($14 million in revenue for Q3, $16 million for Q4) to bring Decibel to a projected $56 million in total revenue for 2021 for an 86.7 per cent year-over-year increase. Sarugaser expects momentum to continue into 2022, projecting $90 million in revenue for a projected 60.7 per cent year-over-year increase.

Sarugaser then projects an adjusted EBITDA of $7 million for 2021, followed by a 142.9 per cent potential year-over-year growth to a projected $17 million in adjusted EBITDA for 2022.

Valuation multiples show Decibel to be an attractive option, with Sarugaser forecasting the EV/Revenue multiple to drop from 5.1x in 2020 to a projected 2.8x for 2021 before falling to a projected 1.7x in 2022. Meanwhile, Sarugaser sees the EV/EBITDA multiple turning positive at 22.9x for 2021, then dropping to a forecasted 9.2x for 2022.

The company is also making moves into the U.S. market, having secured a strategic partnership with Union Cannabis Group, specifically through its Dabstract brand where Decibel can access unique product formulations and intellectual property for the manufacturing of vapes and concentrates in Canada, to be sold under the Dabstract name.

With further U.S. expansion appearing to be the company’s next step, Sarugaser believes the company’s deep roots and long history in cannabis culture will lead to more significant growth moving forward.

“We believe DB is on the cusp of an even more intense revenue inflection as the company realizes a >400% scaling of its cultivation operations by ~4Q21,” he said. :While we expect DB’s 3Q21 results will be similarly impressive to 2Q21, our view is that its 4Q21 earnings will reveal breakout revenue from DB’s massive production ramp, unhindered by COVID19 and manufacturing bottlenecks,” he said.

On comps, Sarugaser estimated Decibel to be trading at a 65 per cent discount to its Canadian cannabis peers.

“DB remains an off-the-radar cannabis story, and the market has been very slow in giving the company credit: a significant early opportunity we identify for our clients,” he added.

Sarugaser alluded to Decibel’s status as a potential acquisition target, pointing to recent acquisitions in the premium cannabis space made by industry bellwether Canopy Growth, part and parcel of the sector’s large appetite for premium, craft cannabis, the analyst said.

“DB’s marriage of ultra-premium priced, microgrow-quality cannabis, strong-selling mid-market offerings, deep roots in cannabis culture (Canada and U.S.), and national-scale production and distribution is what makes this company so notable in our eyes. DB is already punching well above its weight among Canadian LPs—capturing significant market share with its quick revenue ramp during the last 5 quarters—but we believe DB is on the cusp of an even more intense revenue inflection as the company realizes a >400% scaling of its cultivation operations by ~4Q21,” Sarugaser said.

Decibel’s share price has nearly quadrupled in value since January 1, reaching a high point of $0.36/share on August 9.

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Geordie Carragher is a staff writer for Cantech Letter
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