Delta 9 Cannabis is a Buy, says Research Capital

Research Capital Corporation analyst Venkata Velagapudi sees no reason to change his view on Delta 9 Cannabis (Delta 9 Cannabis News, Stock Quote, Chart, Analysts, Financials TSXV:DN), maintaining a “Buy” rating and target price of $1.00/share for a projected return of 156 per cent in an update to clients on Tuesday.

Founded in 2012 and headquartered in Winnipeg, Delta 9 is a vertically integrated Canadian cannabis licensed producer, engaged in the cultivation, processing, extraction, wholesale distribution, retail and sale of medical and recreational cannabis.

The company’s primary retail operations remain in Manitoba, with 11 of the company’s 16 retail stores being located in the province. For Velagapudi, his thesis for the company’s growth relies on its retail expansion strategy across Canada with a focus on prudent capital allocation.

Velagapudi’s latest analysis comes after Delta 9 released initial guidance for its financial results for the third quarter of 2021, with the results expected on November 15.

Management expects revenue to end up being between $15.1 million and $15.4 million for the quarter, which would come in below the Research Capital estimate and the reported second quarter revenue figure, both of which were $16.8 million.

Overall, Velagapudi believes Delta 9 is currently trading at a discount to its peers.

“As we mentioned in our initiation report, our bull thesis on Delta 9 relies on its retail expansion strategy across Canada with a focus on prudent capital allocation. Currently, Delta 9 has 16 retail stores, out of which 11 retail stores are present in Manitoba,” Velagapudi said.

“Based on our analysis, the current market price of Delta 9 implies a large valuation gap within the Canadian universe of cannabis retail players and LPs. We believe that the expansion of Delta 9’s retail footprint and wholesale revenue generation beyond Manitoba will be the key triggers for Delta 9’s share price. Margin improvement driven by Delta 9’s focus on ancillary sales, incremental sales by data sharing and premium shelf space agreements with LPs may lead to an expansion of valuation multiples. Visibility over the sustainability of Delta 9’s market share in retail and wholesale segments will be a key catalyst for the stock price, over the long-term,” Velagapudi said.

Overall, Delta 9’s stock price is down 22.6 per cent for the year to date, having hit its high point of $0.68/share on February 16. The company’s shares began trading on the TSX Venture Exchange in November of 2017.

Since Delta 9 reported its second quarter financial results in August, the company has been busy on multiple fronts, having received approval from Health Canada expand its licensed perimeter at its Winnipeg based facilities from 80,000 square feet to approximately 95,000 square feet, as well as the licensing of a new 7,500 square foot purpose-built storage and distribution area.

Delta 9 continued its expansion efforts by opening new stores in Winnipeg and Selkirk, Man., while also completing the acquisition of two stores in Edmonton for $2.35 million at the end of August.

From a partnership standpoint, Delta 9 has entered into an agreement with Cultivatd, an indoor farming technology broker, to compliment the company’s B2B sales team by helping to target sales opportunities from its Grow Pod shipping containers in Canada and the United States.

Delta 9 also entered into a Strategic Cooperation Agreement with Element GP Inc., in which it will consult with Element as the latter attempts to build its brand after receiving cannabis standard cultivation and standard processing licenses from Health Canada, built around eight of Delta 9’s Grow Pod and Extraction Pod systems.

“Moving forward, we will continue to grow our retail store network throughout Canada, as well as online with our retail business strategy,” said John Arbuthnot, CEO of Delta 9 in the company’s September 24 press release after Report on Business placed the company seventh in its 2021 list of Canada’s Top Growing Companies.

“We will add new craft brands which will enhance our product portfolio and market share, and we will continue to expand into the United States and other international markets as they develop through our cannabis and non-cannabis business segments. These activities are clear indicators highlighting the strength of our operations and our entire team’s ability to outperform in challenging markets,” Arbuthnot added.

Speaking to the company’s 16th store opening, this one in the southwest corner of Winnipeg, Arbuthnot said, “The opening of our newest Winnipeg store highlights our commitment to continued expansion in our retail segment. We expect to continue expanding our retail portfolio across Canada through organic growth and strategic acquisitions in the coming months. This growth strategy has worked well in the past and has been a successful part of the Company’s overall vertical integration strategy.”