With a target drop on account of resetting his valuation methodology, Raymond James analyst Rahul Sarugaser remains in the corner of Indiva Limited (Indiva Limited Stock Quote, Chart, News, Analysts, Financials TSXV:NDVA), pairing the drop from $1.25/share to $0.60/share with an “Outperform 2” rating and a projected return of 130.8 per cent in an update to clients on Wednesday.
Headquartered in London, Ont., Indiva Limited is a licensed producer and distributor of medical cannabis products for the Canadian market. Sarugaser’s newest analysis comes as a preview to the company’s upcoming financial results to end its 2021 fiscal year, set to arrive on April 26.
According to Sarugaser’s channel analysis, Indiva has made progress in improving its overall market share from 2.2 per cent to 2.7 per cent from September to December, placing it 11th among Canadian licensed producers, though Sarugaser noted a dip to 2.1 per cent in the following quarter.
Indiva has also worked to improve its cash position, having increased and amended its term loan by Sundial Growers to give total principal of $20 million.
Sarugaser said Indiva has continued building on its dominance in the edibles category, as its market share grew to 38 per cent at the end of 2021, though that number fell to 34 per cent in the first quarter of 2022 given stiffer competition from second-place Cronos, which grew to a 12 per cent market share, and third-place Organigram, which occupies an 11 per cent market share.
Ahead of the year-end release, Indiva has remained busy, most recently expanding its portfolio into vapes after signing an exclusive licensing and manufacturing agreement with Dime Industries, a California-based vape brand with distribution in California, Arizona and Oklahoma.
The initial agreement is for five years, with three potential five-year extensions also in play with automatic renewals.
“We are delighted to partner with Dime to bring their innovative brand of proprietary, high-quality vape products to the Canadian market,” said Niel Marotta, Chief Executive Officer of Indiva in the company’s April 19 press release. “This is our first entrance into the vape category in Canada, and we could not be more excited about the quality of our chosen licensing partner and their products. Indiva distributes products to all 13 provinces and territories in Canada, and remains committed to growing its top-line and market share organically in Canada -adding vapes to our portfolio of award-winning products is expected to help Indiva accomplish just that.”
However, despite an expectation for the agreement to be accretive beginning in the second half of 2022, Sarugaser cautions against the agreement moving the needle in a significant manner right away.
“Vapes have become a relatively low-margin segment of the Canadian adult-use cannabis sector due to recent price compression, so we remain conservative in our assumptions on this deal being accretive to NDVA’s net margin profile going forward,” Sarugaser said.
The agreement with Dime Industries comes on the heels of Indiva signing an agreement in the previous quarter with American edible brand Grön, which Sarugaser noted to be an encouraging development given the status of its license with Wana after Canopy announced its intent to acquire the gummy maker upon U.S. federal permissibility of cannabis sales.
“In our view, NDVA’s license with Grön furnishes the company with additional routes for penetrating the steadily growing Canadian edibles market (~six per cent share vs. four per cent at the beginning of 3Q21) with novel edibles formats (e.g. candy-coated chocolate ‘Pips’ and minor cannabinoid-containing [CBG, CBN] products) and optionality in case of undesirable outcomes with CGC,” Sarugaser said.
Ahead of the results release, Sarugaser has made some changes to his financial projections, lowering his revenue target from $35 million to $31 million to wrap up 2021. Looking ahead to 2022, Sarugaser lowered his projection from $50 million to $42 million for a potential year-over-year increase of 35.5 per cent, while his 2023 estimate is now set at $70 million (previously $67 million) for a potential year-over-year jump of 66.7 per cent.
From a valuation perspective, Sarugaser has revised his EV/Revenue multiple from 1.9x to 1.5x for 2021, with further forecasted drops to 1.1x in 2022 (previously 1.3x) and 0.7x in 2023 (previously 1x).
Meanwhile, Sarugaser has also modified his EBITDA projections, projecting a $3 million loss for 2021 instead of a $1 million loss, along with a $1 million loss projection for 2022 (previously a $3 million positive projection). Sarugaser does forecast positive EBITDA for 2023 at $7 million for an implied margin of 10 per cent, as well as an EV/EBITDA multiple of 6.4x (previously 9.3x).
Indiva’s stock price has dropped by 28.6 per cent since the start of 2022, initially getting to a high of $0.38/share on January 6 before falling off to a low of $0.25/share today.