Take a pass on Tilray, says PI Financial

Canadian cannabis licensed producer Tilray (Tilray Stock Quote, Charts, News, Analysts, Financials NASDAQ:TLRY), received a maintained a “Neutral” rating from PI Financial analyst Jason Zandberg in an update on Friday, with Zandberg saying Tilray remains a work in progress.

Tilray, which has cannabis operations in Canada, the United States, Europe, Australia and Latin America, earlier this year merged with Aphria to create the world’s biggest cannabis company by revenue.

Zandberg’s latest analysis comes after the company reported its financial results for the first quarter of its 2022 fiscal year.

“While revenue was lower than expectations, TLRY has started to realize some synergies from the legacy Tilray and Aphria merger,” Zandberg said. “These cost savings did enable the company to surpass EBITDA expectations.”

Tilray’s report was headlined by $168 million in revenue, which represented 18 per cent sequential growth, but fell short of the $174 million consensus projection due to weaker than expected cannabis revenue and lower distribution revenue because of a natural disaster involving CC Pharma, TLRY’s pharmaceutical distributor in Germany, which had its operations flooded in July to produce a $5 million revenue loss, higher than the $2.5 to $4 million initially indicated by company management.

However, the company’s EBITDA came in at $12.7 million for the quarter, an increase from the $12.3 million in EBITDA reported in the previous quarter while surpassing the consensus projection of $12.2 million.

Tilray reported net cannabis revenue of $70 million in the quarter, a 38 per cent year-over-year increase attributable to the contribution made by the legacy Tilray business, with Zandberg noting that business would have declined without the legacy revenue because of decreased provincial board buying patterns. 

On the other side of the ledger, restaurant demand for the company’s Sweetwater beverage was reduced, with the company reporting beverage alcohol revenue of $15 million, though it did launch a Broken Coast BC Lager and RIFF vodka soda to build its cannabis brand names within the alcohol markets.

Combining Tilray and Aphria has also helped the company from an efficiency perspective, with management reporting $55 million in run-rate cost synergies to go with $20 million in cost savings. Tilray said further synergies were possible in the areas of cultivation, production, sales and marketing and corporate expenses.

Through its first quarter results, the company believes it is executing against the mandates of maximizing near-term profitability through leadership in both higher-margin international medical markets and in Canada, while trying to capitalize on the nearly $200 billion global cannabis market opportunity.

“We believe we are ideally-positioned to succeed due to our global consumer-packaged goods expertise and scale, our diverse portfolio of brands, our reputation as a trusted supplier of high-quality cannabis, battle-tested leadership and a relentless focus on driving sustainable shareholder value. We look forward to accelerating our momentum as we build the leading CPG business in the global cannabis industry,” said Irwin Simon, Tilray’s Chairman and Chief Executive Officer in the company’s October 7 press release.

In August, the company announced that it had acquired majority of the outstanding senior secured convertible notes of MedMen, a leading cannabis retail brand in the U.S. with 21 licenses and 25 retail locations across key urban centers, including the Bay Area, Los Angeles, Boston, Chicago, and Las Vegas, and a significant position in California.

Zandberg expects Tilray to take a step forward in the next quarter, projecting revenue of $189 million for 12.5 per cent sequential growth to go with $17 million in EBITDA for a nine per cent margin compared to the 7.7 per cent margin from the first quarter.

Looking through an annual lens, Zandberg expects the company to rebound after 2021’s $513 million came in below the $543 million reported in 2020. Zandberg projects the company to reach $746 million in 2022 for a potential 45.4 per cent year-over-year increase, with another jump to a projected $896 million in play for 2023, marking a potential year-over-year increase of 20.1 per cent.

Meanwhile, Zandberg projects the company’s EBITDA to reach new stages in the coming years, with the $98 million projection for 2022 representing a margin of 13.1 per cent compared to the eight per cent margin reflected in the $41 million of EBITDA reported in 2021. Zanbderg then projects $131 million in EBITDA in 2023 to represent a margin of 14.6 per cent.

Zandberg’s valuation data shows itself to be more positive for Tilray, with the EV/Revenue multiple projected to drop from 12.9x in 2021 to 8.9x in 2022, with another drop to 7.4x projected in 2023. Meanwhile, after its first report at 162.2x in 2021, Zandberg projects the company’s EV/EBITDA multiple to fall to 67.6x in 2022, with another drop to 50.5x projected in 2023.

“We are anticipating increasing adult-use cannabis revenue as the Canadian market grows with the recent surge in retail locations (growing from 600 to about 1,200 this year). Our Q4 cannabis net revenue estimate (both medical and adult-use) is $87 million. We also expect modest alcohol sales growth for the remainder of this fiscal year due to the increase in distribution points and new product launches. We do not expect much growth in the pharmaceutical distribution business this year but are modelling a 15 per cent growth for FY23,” Zandberg wrote.

Overall, Tilray’s stock price has dropped by 30.9 per cent over the course of the year, declining steadily since hitting its high point of $26.00/share on June 9. With his “Hold” rating Zandberg has reiterated a target price of $16.00/share for a projected return of 17.6 per cent.