Buy Decibel Cannabis at a discount to its peers, says Raymond James

Look for Decibel Cannabis (Decibel Cannabis Stock Quote, Chart, News CVE:DB), to begin ramping up its business after completing a new financing round. That’s the scuttlebutt from Raymond James analyst Rahul Sarugaser who in a September 23 report maintained a rating of “Outperform 2” on Decibel while dropping his target share price from $1.00/share to $0.85/share for a projected one-year return of 254 per cent.

Headquartered in Calgary, Decibel Cannabis is an agro-based licensed producer and retailer of premium craft cannabis with three production houses: its Qwest estate in Creston, BC, the Thunderchild cultivation facility in Saskatchewan and a 15,000-square foot extraction facility called The Plant.

Sarugaser’s latest analysis comes after Decibel announced it had secured additional financing, closing on a previously announced bought deal for gross proceeds of $15 million.

“We view [the financing] as a significant de-risking event for the company—improving its debt to equity ratio—and providing fuel for DB’s operational and commercial ramp during the next 12 months,” Sarugaser said, attributing the target drop to a dilution, though he noted that the company now presents a 70 per cent discount to its peers compared to the 65 per cent discount presented during Sarugaser’s coverage initiation in August on account of an asymmetrical post-financing decline.

As evidence of the company’s growth ramp, Sarugaser noted that the company is getting ready to launch 27 new products within the Ontario markets, including 14 new flower products (six jarred SKUs, six pre-rolls, a blended milled flower, and a General Admission large format pre-roll) and 13 vape and concentrate products, including six under the Pressed by Qwest brand and seven under the General Admission label.

“With our $15 million oversubscribed equity financing now closed, we are now positioned for Decibel’s next stage of growth through high return on capital investments, which expand our capacity and gross margins, as well as accelerating our already robust 2022 product pipeline.” said Paul Wilson, Chief Executive Officer of Decibel in the company’s September 22 press release announcing the closed financing. “We remain focused on expanding our market share as we fully realize the impact of our 2021 growth initiatives in the fourth quarter.”

The company’s performance also speaks to Sarugaser chronicling the company’s rise to become a top-ten licensed producer in Canada on account of market share, with its three per cent clip in August good enough to lock up ninth place, and a belief that mid-month data in September indicates that Decibel’s market share is durable on account of in-line growth.

“We continue to be impressed by this company’s finely tuned approach to brand formation and product development, grounded firmly in a closeness to North American cannabis culture,” Sarugaser noted.

Though Decibel initially made its name in the premium cannabis market through the Qwest label, Sarugaser notes that the company has worked to understand unattended market niches and serving them with well-honed brands and superior craft cannabis products, with its General Admission brand helping the company rise to third place in the Canadian vape market just behind Tilray, while the Blendcraft and Pressed by Qwest brands have together impelled Decibel’s ascent to second place in the steadily growing loose concentrates category.

The update has prompted small changes to Sarugaser’s financial metrics, as he now projects $55 million in revenue for 2021 compared to the original $56 million target for a potential year-over-year increase of 83.3 per cent, with a slight increase to $91 million (previously $90 million) projected for 2022, marking a potential year-over-year increase of 65.5 per cent.

Sarugaser also made changes to key valuation metrics, as he forecasts the company’s EV/Revenue from 2020 to be 4.7x instead of 5.1x, with further projections of 2.6x for 2021 (previously 2.8x) and 1.6x for 2022 (previously 1.7x), while the EV/EBITDA projections have also improved, with a revised 2020 figure of (389.4)x compared to the initial forecast of (423.1x), with shifts to 21.3x for 2021 (previously 22.9x) and 8.4x for 2022 (previously 9.2x) in play.

Meanwhile, Sarugaser’s EBITDA projections remain unchanged for 2021 ($7 million, 12.7 per cent margin) and 2022 ($17 million, 18.7 per cent margin), respectively.

With the new financing earmarked for product development, infrastructure projects and building out its key cultivation facility, The Plant, Sarugaser believes Decibel is well-situated to continue broadening its exposure to key Canadian cannabis market segments as it prepares a move to its next revenue step change.

“It is not outside the realm of possibility, in our view, that DB would begin hunting for strategic M&A opportunities to shore up (or build anew) its foundation in certain market segments,” Sarugaser said. “Given DB’s dominance in inhalables (particularly vapes, concentrates), we could see the company courting players in the ingestibles space, or potentially looking to bolt on locally-significant craft cannabis brands.”

Overall, Decibel’s stock price has risen 133.3 per cent for the year to date, reaching a high point of $0.36/share on August 9.