Decibel Cannabis is undervalued, says Haywood

Neal Gilmer of Haywood Capital Markets likes what he’s hearing from Decibel Cannabis Company (Decibel Cannabis Stock Quote, Chart, News TSX:DB), maintaining a “Buy” rating a $0.60/share target price, implying a potential return of 362 per cent in an update to clients on Monday.

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 2022 financial outlook, along with its strategic priorities.

“Through the development of new innovative products, broader distribution, and completion of its processing hub to provide automation, the company is poised for a year with a notable improvement across numerous financial metrics,” Gilmer said. “In our view, the objectives and expected milestones are supportive of our overall thesis on Decibel.”

In their outlook, Decibel set expectations for high double-digit revenue growth achieved through broader distribution with an innovative product pipeline, with management also targeting gross margins between 40 and 45 per cent. Furthermore, the company expects to achieve positive cash flow in the first half of 2022. In addition, after repaying its outstanding convertible debentures, Decibel will have a blended cost of debt capital of less than five per cent, while revenue growth and improving margins are expected to strengthen the balance sheet with the expectation of less than 3.0x debt to TTM adjusted EBITDA in 2022.

Strategically, Decibel said it aims to increase customer experiences, become more aggressive in its sales growth and achieve greater differentiation on its products, with the goal of showcasing Qwest as a leading premium brand that extends to its other brands and products.

Organizationally, Decibel has established a new consumer insights department to support its product development pipeline. With the new department, Decibel has added Warren Matzelle as its new Chief Product and Marketing Officer, while Adam Coates has been brought on as the company’s new Chief Revenue Officer.

“We have established a solid foundation through strong execution of our priorities in 2021 and are well positioned to execute on our 2022 objectives and achieve strong year over year growth in revenue and margins,” said Paul Wilson, CEO of Decibel in the company’s January 31 press release. “Demand for our brands and products in the recreational market continues to exhibit strong growth, confirming our thesis that quality across category expansion, consistency, and revenue growth, will lead to creation of competitive advantages for years to come.”

Gilmer forecasts Decibel taking a couple of 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.

“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 12.5 per cent since the calendar turned to 2022, and is down 22.2 per cent over the last 12 months. The stock has remained in a range between its 52-week low of $0.13/share from January 27 and its 52-week high of $0.36/share, last achieved on August 23.