Solid quarter from Decibel Cannabis, says Raymond James

Calgary-based Decibel Cannabis Company (Decibel Cannabis Stock Quote, Charts, Financials, News CVE:DB) just delivered third quarter earnings which registered top and bottom line beats of estimates from Raymond James analyst Rahul Sarugaser, and Sarugaser reviewed the results in an update to clients on Thursday where he reiterated his “Outperform 2” rating for the stock.

Decibel Cannabis is an agro-based company with three cannabis production houses: its Qwest estate in Creston, B.C., the Thunderchild cultivation facility in Saskatchewan and a 15,000-square foot extraction facility in Calgary called The Plant.

Decibel’s Q3 report was headlined by $13.4 million in revenue, beating the Raymond James estimate of $12.8 million while being effectively in-line with the consensus projection of $13.3 million; the figure also represented 8.1 per cent sequential growth.

The revenue beat was driven by an 11 per cent sequential increase in sales, influenced by the company maintaining a strong market share led by strong vape sales (13 per cent market share, third in its category) and flower sales (nine per cent market share, second in its category), along with solid performance from its retail stores.

Decibel’s overall revenue growth is also expected to get a boost as its continue the rollout of its new product suite, which began in September and consists of 40 new product SKUs, including additions to its newly launched infused pre-roll format, which Sarugaser noted to be a high-margin, high-demand item. 

The company’s EBITDA came in at $1.8 million for the quarter, beating the Raymond James estimate of $1.4 million while remaining in line with the consensus projection of $1.9 million, though it came in below the previous quarter’s EBITDA of $2.1 million, representing a sequential decrease of 17 per cent.

In addition to the lowered EBITDA, the company’s gross margin also dropped from 41 per cent to 31 per cent; in the case of both items, Sarugaser attributed the margin pressure to the upscaling of Decibel’s Thunderchild production facility, with a direct through line in its investment going toward increased revenue projections beginning in the first half of 2022, which is when the company should be able to satisfy consumer demand for its super premium, high-margin QWEST products.

“We expect to see the initial impact of this expanded capacity flow through to escalating revenue during 4Q21, but expect margins to remain challenged—to a similar degree as in 3Q21—by supply chain challenges and, importantly, B.C. flooding impacts,” Sarugaser said.

The Thunderchild facility is estimated to account for 79.1 per cent of Decibel’s overall 9,232 kilogram production volume, with the rest coming from its Creston operations.

Meanwhile, net income was reported as a $900,000 loss, beating the $1.4 million loss projection set out by both Raymond James and the consensus.

Decibel also improved its liquidity position, finishing the quarter with $11.3 million in cash compared to the $3.7 million reported in the previous quarter, while reducing its debt from $51 million in Q2 to $36.6 million.

“Decibel’s continued growth is a testament to our consumer focused approach, the strength of our brands, and our dedication towards producing high quality products for our customers,” said Paul Wilson, CEO of Decibel in the company’s November 18 press release. “We are closing out 2021 with strong momentum as we launch 40 new products, elevate the experience our products create for consumers, and innovate to meet cannabis consumers’ evolving preferences.”

The updated results have led to changes to Sarugaser’s financial metrics, as he projects $54 million in revenue for 2021 for a potential year-over-year increase of 80 per cent, with another significant jump to $96 million projected for 2022, marking a potential year-over-year increase of 77.8 per cent.

Sarugaser’s key valuation metrics also show Decibel in a heightened state, as he forecasts the company’s EV/Revenue from 2020 to be 4.4x, with further projections of 2.4x for 2021 and 1.4x for 2022, while the EV/EBITDA projections also move in the right direction, setting his 2020 figure at (361.8)x, with shifts to 21.3x for 2021 and 8.4x for 2022 in play.

Meanwhile, Sarugaser’s EBITDA projections take the thinner margins from the Thunderchild investment into accounting, projecting $6 million in EBITDA and a margin of 11.1 per cent for 2021, improving to $19 million and a 19.8 per cent margin for 2022.

Overall, Decibel’s stock price has risen 127.8 per cent for the year to date, reaching a high point of $0.36/share on August 9.

With his reiterated “Outperform” rating, Sarugaser maintained his $0.75 per share target price, which at the time of publication represented a projected one-year return of 241 per cent.