Tonnes of upside to Decibel Cannabis, says Haywood

Neal Gilmer of Haywood Capital Markets likes the sound of Decibel Cannabis Company (Decibel Cannabis Stock Quote, Chart, News CVE:DB), maintaining a “Buy” rating with a near quadruple on the projected return in an update to clients on Friday.

Calgary-based Decibel cultivates, processes, produces and sells cannabis products in Canada, including cannabis flower, cannabis pre-rolls and cannabis biomass. Decibel also extracts, processes and manufactures cannabis derivatives while operating under the Qwest, Qwest Reserve and Blendcraft by Qwest brands. 

Gilmer’s updated analysis comes after Decibel announced a restructured agreement with connectFirst Credit Union.

“While Decibel has increased its total debt outstanding, the ability to repay the coming due debentures and refinance existing debt significantly improves the company’s liquidity position,” Gilmer said. “The long-term debt at industry leading rates will allow for Decibel to continue its growth trajectory and ability to optimize operations to drive expanding margins.”

Under the terms of the new agreement, Decibel now has the capital to pay the convertible debentures it has due in May, as well as the flexibility to support future growth initiatives.

The modified agreement has a five-year initial term, featuring $40.5 million in term debt at 4.75 per cent (a $12 million increase from the previous agreement), a $6 million authorized overdraft at prime rate plus one per cent and a $7.5 million accordion line at prime rate plus two per cent.

The agreement also comes with additional covenants, including an annual test of debt-to-equity ratio of less than 1.00:1, a quarterly test of a debt service coverage ratio of not less than 1.40:1 and a monthly current ratio test of not less than 1.25:1.

According to Gilmer, the increased term debt along with cash from operations is expected to be sufficient to pay the $11.4 million in outstanding convertible debt Decibel has coming due. Additionally, the company is refinancing $12 million in upcoming term debt to eliminate near-term debt liabilities. Meanwhile, the company also has $11.3 million in cash as of the end of its third quarter, and will be able to access the additional term debt on request and the accordion once the funded debt to EBITDA ratio covenant is met.

“With this refinancing, Decibel has added financial flexibility to optimize its capital structure and is well positioned to continue to execute its aggressive growth strategy,” said Stuart Boucher, Chief Financial Officer of Decibel in the company’s January 14 press release. “This transaction reflects the strong position Decibel has established in the Canadian cannabis market and the continued confidence from connectFirst and our team in the execution of the company’s strategic plan.”

Since the announcement of the refinancing, Decibel has also provided a Canadian recreational market share update in which its foothold has grown to 3.4 per cent in Canada, 3.1 per cent in Ontario specifically, and 4.2 per cent in major markets through the end of December, incremental gains in each category.

“With our debt refinancing now in place, we remain on the offense, growing revenue and closing 2021 with record market share driven through our core focus to elevate our consumer experience through quality combined with new, unique and innovative products,” said Paul Wilson, Chief Executive Officer of Decibel in a January 17 press release. “With a strong foundation established through efforts in 2021, and impactful 2022 catalysts, we are well positioned to continue our strong revenue and market share growth.”

Gilmer forecasts Decibel taking a couple steps forward in his financial projections, estimating that the company will hit $54.3 million in revenue once the 2021 fiscal year concludes, implying a year-over-year increase of 81.6 per cent over the reported $29.9 million in revenue in 2020. Looking to 2022, Gilmer projects a jump to $76.4 million, an implied year-over-year increase of 40.7 per cent.

Meanwhile, Gilmer also expects the company’s EBITDA to grow over the same time period, jumping from $1.5 million and a five per cent margin in 2020 to $8.8 million and an implied margin of 16.2 per cent, then increasing again to a projected $15.7 million in EBITDA in 2022, implying a margin of 20.5 per cent.

Gilmer notes that Decibel is trading at 1.3x the Hayward revenue estimate for 2022, a slight discount in comparison to the Canadian peer group average of 1.6x.

“In our opinion, Decibel has demonstrated the quality of its brands by capturing strong market share relative to overall sales,” Gilmer said. “As Decibel garners more awareness within the investor base, we believe the valuation will reflect this strong position in the market.”

Decibel’s stock price has dipped by 9.4 per cent over the last 12 months, remaining in a range between its present value of $0.14/share and its 52-week high of $0.36/share, last achieved on August 23.

With his “Buy” rating, Gilmer has maintained a $0.60/share target price which at press time reflected a 12-month return of 287 per cent.