Rubicon Organics should have a strong H2 21, says Raymond James

Raymond James analyst Rahul Sarugaser is optimistic about Rubicon Organics (Rubicon Organics Stock Quote, Chart, News, Analysts, Financials TSXV:ROMJ), maintaining an “Outperform 2” rating and target price of $5.00/share in an update to clients on Friday.

Founded in 2015 and headquartered in Delta, B.C., Rubicon Organics is a licensed producer of cannabis operating in Canada’s adult-use and medical cannabis markets with a focus on the production of super-premium cannabis.

Sarugaser’s latest update comes after Rubicon reported its second quarter financial results, which were largely in line with Sarugaser’s estimates.

“With its small revenue beat, ROMJ’s 2Q was right in line with our expectations: relatively flat QoQ sales due to COVID-19 retail closures during 1H21,” Sarugaser wrote. “That said, ROMJ managed to maintain #1 position in organic dried flower nationally, #1 premium brand in BC—Canada’s most influential market that, in our view, portends broader national adoption—as well as top 6 in premium in ON, AB and QC.”

Rubicon reported $4.6 million in revenue for the quarter, slightly outpacing the Raymond James estimate of $4.3 million and the consensus projection of $4.2 million and representing a 12.2 per cent quarter-to-quarter increase. Meanwhile, the company also reported a $9.1 million loss in net income, beating the Raymond James estimate of a $12.8 million loss, along with the consensus estimate of an $11.7 million loss.

The company’s adjusted EBITDA figures had Rubicon losing $3.4 million, which was in line with the Raymond James projection of a $3.6 million loss, but missing the consensus projection of a $3 million loss.

Rubicon has $4 million in cash available with an additional $20 million in working capital compared to a total of $20.2 million in the first quarter, paired with $9.3 million in total debt, though the company did pay off $9 million in second mortgage loans in the quarter.

The company also worked closely with a number of provinces and territories, securing a purchase and sale agreement with the Yukon Liquor Corporation to distribute its products while receiving initial orders from Manitoba Liquor and Lotteries and Cannabis NB.

“Our share of the premium cannabis segment in Canada remains strong and we remain the go to organic brand among consumers. With 44 SKUs across five brands, we can focus on meeting the rising demand from provincial distributors which is beginning to reflect both a return to normalized buying patterns and our new SKUs in high growth product categories,”  said Jesse McConnell, CEO for Rubicon in the company’s August 20 press release.

“It is very important for us to emphasize Rubicon Organics’ success in getting its new products listed with major provincial distributors in the face of significant curtailments by these buyers. As 1964 Supply Co and Homestead Cannabis Supply in particular hit the market across new provinces in Q3 2021, we will be seeing the results of our extension in the premium and mainstream flower segments which represent large volume and incremental revenue pools for the Company,” he said.

Rubicon’s updated financial results prompted slight revisions to Sarugaser’s financial estimates, as he projects the company will reach $20 million in revenue for 2021, a 122.2 per cent year-over-year increase, while his 2022 forecast projects a 120 per cent year-over-year revenue spike to $44 million.

Sarugaser’s primary revisions come in the valuation data, where he now projects the company’s EV/Revenue multiple to be slightly higher at 6.5x for 2021 instead of the initial 5.5x estimate, then revising his 2022 estimate to 3x compared to the original 2.5x projection.

The EV/EBITDA multiple revisions show more fluctuation, as Sarugaser now projects a negative EV/EBITDA of 16.5x for 2021 compared to the initial estimate of a negative 13.4x EV/EBITDA, while he now projects the 2022 multiple to be 16.8x compared to the initial projection of 14x.

With the impending launch of two new brands and COVID shutdown orders being lifted, Sarugaser believes Rubicon is ready to turn the corner from a business perspective.

“ROMJ has seen accelerating sales velocity into 3Q, and we agree with the three factors management outlines – broad increase in its SKU count; new brands, 1964 and Homestead, being introduced; and Ontario restocking in September— driving a material increase in revenue through 2H21; hence our 3Q and 4Q revenue estimates of $5.1 million and $6.5 million respectively,” he said. “To this end, we calculate an EBITDA breakeven point in the ~$6.5 million range, so estimate ROMJ turning durably +EBITDA from 4Q21 onward.”

Rubicon Organics closed Friday trading at $2.17/share on the TSX Venture Exchange, down eight cents from its Thursday closing of $2.25/share. Overall, Rubicon’s share price has dropped by 39.4 per cent for the year to date, reaching a high point of $4.10/share on February 16. At press time, Sarugaser’s $5.00 target represented a projected one-year return of 122.2 per cent.