Tilray is still a pass, says Haywood

Haywood Capital Markets analyst Neal Gilmer has taken a bigger hack at Tilray Inc (Tilray Stock Quote, Chart, News TSX:TLRY) lowering his target price from $8/share to $7.25/share while maintaining a “Hold” rating and projecting a loss of one per cent in an update to clients on Tuesday.

New York-headquartered Tilray is a cannabis lifestyle and consumer goods company with a suite of 20 different brands across 20 countries internationally and including rec and medical cannabis products and hemp-based foods and alcoholic beverages.

Gilmer’s update comes after Tilray released on Monday second quarter financial results for its 2022 fiscal year, with Gilmer’s price drop coming less than a week after the analyst slashed his target from $12.50/share to $8/share in a quarterly preview.

“While revenue was below expectations, prudent cost management resulted in EBITDA above expectations,” Gilmer said. “The company remains a leader in market share in Canada and is taking actions to stem the recent decline in market share through its pricing strategy.”

Tilray’s quarter was headlined by $155 million in revenue (all report figures in US dollars except where noted otherwise) for a seven per cent sequential decrease, coming in below the $165 million projection set out by Gilmer, and also missing the mark on the $171.5 million consensus estimate.

According to Gilmer, the miss is largely attributable to a 17 per cent decrease in cannabis sales along with an 11 per cent decrease in beverage sales.

However, with the integration of its operations being ahead of schedule, Tilray reported its 11th consecutive quarter of positive adjusted EBITDA at $13.8 million, with the implied 8.9 per cent margin coming out well ahead of the 7.1 per cent projection from Gilmer, as well as the 7.7 per cent margin implied by the consensus estimate.

Of particular note, Tilray management announced realized synergies yielding $70 million in annual run-rate costs and actual cash savings of $36 million, with an expectation of achieving its goal of saving $80 million by the end of the fiscal year, along with identifying $20 million in additional savings in 2023.

Tilray also highlighted its increasing presence in Germany, buoyed by its position as the only company supplying medical cannabis cultivated in the country, estimating an overall market share of 20 per cent, headlined by a 10 per cent sequential jump in dried flower sales, as well as a 16 per cent sequential jump in extract product sales.

“Our second quarter performance reflects notable success building high-quality and highly sought-after cannabis and lifestyle CPG brands which, coupled with our scale, operational excellence and broad global distribution, enabled us to increase sales and maintain profitability despite sector-specific and macro-economic headwinds,” said Irwin D. Simon, Tilray’s Chairman and Chief Executive Officer in the company’s January 10 press release.

“The totality of our performance, our prospects and our global platform make Tilray Brands’ opportunity as compelling as ever, driven by our success as a cannabis and lifestyle CPG powerhouse and our relentless focus on delivering shareholder value,” Simon added.

The updated financials also prompted changes to Gilmer’s future financial projections, lowering his revenue estimate for 2022 from $704.2 million to $662.7 million, which still implies a year-over-year increase of 29.2 per cent. He also dropped his revenue target for 2023 from $860.7 million to $783.5 million, though the new figure still implies a year-over-year increase of 18.2 per cent.

Meanwhile, after slashing his adjusted EBITDA targets last week, Gilmer makes further adjustments in his updated analysis, increasing the implied margin from 8.2 per cent to 8.7 per cent, albeit at a lower adjusted EBITDA of $57.7 million compared to $58 million. For 2023, Gilmer has further lowered his projection from $109.2 million and a 12.7 per cent margin to $91.2 million and a margin of 11.6 per cent.

From a valuation perspective, Gilmer sees Tilray’s position continually improving, as he projects the company’s EV/Revenue multiple to dip from the reported 7.7x in 2021 to a projected 5.9x in 2022, then to a projected 5x in 2023. Meanwhile, after introducing an EV/EBITDA multiple of 96.5x in 2021, Gilmer projects a drop to 68.2x in 2022, then to a projected 43.1x in 2023.

“Tilray remains the market share leader in the Canadian landscape albeit with declining market share,” Gilmer said. “We are also encouraged by the international opportunities, including the recently announced U.S. transaction. However, we remain cautious on the overall Canadian landscape which drives the majority of its revenue growth opportunity in the near-term.”

Along with the rest of the industry Tilray’s stock price has been trending downward over the last eight months, down 51.3 per cent since it began trading in May. Its high point came on June 9 when it was trading at $26/share, but it has been downhill ever since, hitting a 52-week low of $8.13/share on January 7.