Decibel Cannabis is a Buy, says Raymond James

Raymond James analyst Rahul Sarugaser thinks Decibel Cannabis Company (Decibel Cannabis Stock Quote, Chart, News, Analysts, Financials TSXV:DB) could be ready to make some noise, maintaining an “Outperform 2” rating and a target price of $0.40/share for a projected return of 263 per cent in an update to clients on Friday.

Headquartered in Calgary, Decibel Cannabis is an agro-based company that has three cannabis production houses designed and operated with craftsmanship and quality: the Qwest estate in Creston, B.C., the Thunderchild cultivation facility in Saskatchewan, and a 15,000-square foot extraction facility called The Plant.

Sarugaser’s updated analysis comes after Decibel announced its fourth quarter 2021 financial results, along with year-end figures.

“While DB drove an impressive quarter of top-line and market share gains, as well as entry into (and solid leadership of) new product categories, 4Q21 was certainly a building quarter that came with series of challenges, including supply chain constraints, price compression, and inventory management issues,” Sarugaser said.

Decibel’s financial reports were headlined by $14 million in revenue for the quarter for a 4.5 per cent sequential increase, which came in slightly ahead of the Raymond James projection of $13.5 million while being in line with the consensus expectation of $14.6 million.

Meanwhile, adjusted EBITDA was a significant beat at $1.5 million for an implied margin of 10.7 per cent, significantly outpacing the Raymond James estimate of a $1.8 million loss and the consensus projection of $500,000 in positive adjusted EBITDA, though the figure did come in below the $1.8 million in adjusted EBITDA reported in the previous quarter.

Overall net income was also a beat at $700,000 to outpace the $4 million loss estimate set by both Raymond James and the consensus, while also turning positive in relation to the $900,000 loss experienced in the previous quarter.

However, the company’s cash situation has gotten a bit tighter after dropping from $11.3 million in the third quarter to $1.9 million available after the fourth quarter, paired with $45.5 million in debt, up from $36.6 million in the previous quarter.

“Decibel continues to execute on its strategy to accelerate revenue growth and deliver new, unique and innovative choices to cannabis consumers. The success achieved through 2021 with record market share demonstrates the strength we’ve created in our brands, and our dedication towards our customers”, said Paul Wilson, CEO of Decibel in the company’s April 22 press release. “Our momentum has accelerated into 2022, and we are gaining great traction across our products and brands, particularly with our recent infused product launches over late Q4 and first quarter of 2022.”

Decibel also announced a high-profile appointment to its board in March, with Dragon’s Den investor Manjit Minhas on board as a Senior Advisor to the Board of Directors ahead of a director nomination, which is expected to come in June.

Overall, Decibel wrapped up 2021 with $52 million in revenue, marking a 75 per cent year-over-year increase. Looking ahead to 2022, Sarugaser forecasts a 50 per cent jump to $78 million in revenue, while projecting a drop in the company’s EV/Revenue multiple from 2.8x in 2020 to 1.6x in 2021, then to a projected 1.1x in 2023.

The company also nearly quadrupled its adjusted EBITDA production to end 2021 at $7.4 million, though Sarugaser forecasts a drop to $4 million in adjusted EBITDA for 2022. In terms of valuation, Sarugaser expects the company’s EV/EBITDA multiple to fall from the reported 56.1x in 2020 to 12.1x in 2021, though he projects a rise to 18.6x in 2022.

Looking ahead to 2022, Sarugaser expects Decibel to experience steps forward in revenue, as well as in its margins, on account of a ramping up in new product launches with 15 expected in 2022, paired with product penetration in new markets and new manufacturing processes.

In addition, Sarugaser expects process improvements to come from the Qwest and Thunderchild cultivation sites, while the margin expansion would come about on account of the company bringing a number of its processing, packaging,and testing functions in-house, with the company expecting to hit a gross margin of between 40 and 45 per cent by the middle of 2022.

“DB has been commendably forward-looking in the investments it has made in infrastructure, manufacturing processes, and product development to ensure continued growth and success of this business; we believe many of the headwinds DB faced during 4Q21 will dissipate through 1H22,” Sarugaser said.

Decibel’s stock price has dropped off by 31.3 per cent since the start of 2022, having last hit its 2022 high point of $0.16/share on January 17. Since then, the stock has dropped to a 2022 low of $0.10/share on multiple occasions, most recently on April 18.