Tilray is still a pass, says Haywood

Haywood Capital Markets analyst Neal Gilmer believes Tilray Inc (Tilray Stock Quote, Chart, News TSX:TLRY) could be in the weeds on account of a slow quarter, slashing his target price from $12.50/share to $8/share while maintaining a “Hold” rating in an update to clients on Wednesday.

Headquartered in New York, Tilray researches, cultivates, produces, markets and distributes medical cannabis products and features 20 different brands, with operations in Canada, the United States, Europe, Australia, New Zealand, Latin America and internationally.

Gilmer’s updated analysis comes as a preview of Tilray’s second quarter financial results for its 2022 fiscal year which are to be reported on January 10.

“We are lowering our estimates given the recent decline in Canadian adult-use market share and sequential decrease in sales at the retail level, according to Hifyre data,” Gilmer said.

Gilmer is forecasting Tilray to report revenue of $165 million for a two per cent sequential decline, along with $11.8 million in adjusted EBITDA for a margin of 7.1 per cent compared to the 7.6 per cent margin in the previous quarter. By comparison, the consensus expectations call for Tilray to report $174.2 million in revenue with $14.3 million in adjusted EBITDA, implying a margin of 8.2 per cent.

Meanwhile, the gross margin takes a slight uptick to 29.3 per cent compared to the consensus expectation of 29.1 per cent, but it comes at a reduced gross profit of $48.3 million, down from the consensus estimate of $50.6 million.

Gilmer’s shifted expectations come on account of declining Canadian cannabis revenue, offset slightly by growth in Tilray’s other business segments.

“Tilray has struggled to maintain its market share in the Canadian adult-use market and has been trending away from its target of 30 per cent as of recent,” Gilmer said. “The Company will likely turn to price competition or look to use the strength of its balance sheet for M&A to increase Canadian market share.”

Tilray has kept busy on the product diversification front, acquiring Colorado-based Breckenridge Distillery, a leading distilled spirits platform known for its bourbon whiskey and innovative craft spirits, in December. The transaction is immediately accretive for Tilray, Gilmer said, with adjusted EBITDA margins of approximately 25 per cent. Gilmer said the acquisition provides opportunity for further growth and expanding EBITDA margins in the second half of fiscal 2022.

“Tilray’s strength lies in our ability to identify and significantly expand leading CPG lifestyle brands that resonate powerfully with consumers,” said Irwin D. Simon, Chairman and CEO of Tilray in the company’s December 8 press release. “Breckenridge Distillery is an iconic addition to our platform in this respect based on its portfolio of award-winning spirits, passionate consumer engagement, and a strong sales and distribution network. We see tremendous potential for Breckenridge and our existing SweetWater brand to complement each other, expanding their respective reach and driving further profitable growth in our beverage alcohol segment.”

The updated expectations have prompted Gilmer to revise some of his financial projections, lowering his forecasts for both 2022 and 2023. From a revenue perspective, Gilmer dropped his 2022 target from $743 million to $704.2 million, which would still imply a year-over-year increase of 37.2 per cent. He also dropped his 2023 estimate from $914.9 million to $860.7 million, implying a year-over-year increase of 22.2 per cent.

The biggest hit in Gilmer’s revised projections comes to the adjusted EBITDA, which he dropped from $80.5 million and a 10.8 per cent to a projected $58 million and 8.2 per cent margin in 2022. The drop is even more pronounced in 2023, with Gilmer now forecasting $109.2 million in adjusted EBITDA with a 12.7 per cent, a one-third loss from the previous estimate of $162.1 million and a 17.7 per cent margin.

Gross margin also dips in the revised projections, with Gilmer now projecting 2022 to come in at $214.1 million for a 30.4 per cent margin (previously $238.8 million and a 32.1 per cent margin), with 2023’s projection now set at $282.2 million for a 32.8 per cent margin (previously $330.1 million and a 36.1 per cent margin).

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

At press time, Gilmer’s new C$8.00 target represented a projected one-year return of 13 per cent.