Sundial Growers is still a pass, says ATB

ATB Capital Markets analyst Frederico Gomes thinks Sundial Growers (Sundial Growers Stock Quote, Chart, News NASDAQ:SNDL) could have a brighter future ahead but he stuck with his “Sector Perform” rating in an update to clients on Thursday.

Calgary-based Sundial Growers produces, distributes and sells cannabis products through adult-use markets and its own franchised retail operations in Canada. The company also produces and distributes inhalable products like flower, pre-rolls and vapes while offering its products under the Top Leaf, Sundial Cannabis, Palmetto and Grasslands brands.

Gomes provided his latest analysis after the company announced its financial results for the fourth quarter of 2021, with year-end figures also presented.

Sundial’s quarterly financials provided beats across the board, headlined by revenue of $22.7 million to outpace the ATB estimate of $18 million and the consensus projection of $16.7 million in revenue, while also presenting a sequential increase of 32 per cent and a 63 per cent year-over-year increase.

Sundial’s revenue mix was close to an even split for the quarter, with cannabis cultivation and production coming in at $12.8 million in revenue for 56.4 per cent of the split, while cannabis retail accounted for the remaining $10 million.

The company’s margin items produced a similar story, with Sundial’s adjusted gross profit coming in at $6.8 million for a 30 per cent margin to nearly double the ATB expectation of $3.6 million and a 20.2 per cent margin, as well as the consensus estimate of $3.1 million and an 18.6 per cent margin.

According to Gomes, the beat on revenue and adjusted gross profit was driven by results from core cannabis operations.

Meanwhile, Sundial’s adjusted EBITDA for the quarter came in at $18.4 million and a margin of 81.2 per cent to blow away the ATB expectation of $5.2 million and a 28.7 per cent margin, as well as the consensus projection of $4.4 million and a 26.3 per cent margin.

According to Gomes, a significant portion of the company’s adjusted EBITDA beat came from its stake in Sunstream, in which Sundial invested $70.3 million subsequent to the end of the quarter to bring its total investment in the company to $412.9 million. However, the figures did not include unrealized losses on marketable securities, which came in at $43.8 million.

All told, Sundial Growers ended the quarter with $558.3 million in unrestricted cash (reduced to $377.7 million on the day of the report), $83.7 million in marketable securities, $73.6 million in investments, which included a $19.4 million in a term loan to Indiva Limited, and $51.9 million aggregate principal amount senior secured debt to Zenabis, now owned by HEXO Cannabis.

“2021 was a transformational year for Sundial. We increased the sustainability of our business model, establishing a strong balance sheet, positive Adjusted EBITDA results, and significant improvements in gross margin,” said Zach George, Chief Executive Officer of Sundial in the company’s April 27 press release. “We continue to focus on improvements to our supply chain and manufacturing processes, against a competitive and challenging operating environment in Canada. Sundial is working to become a leading regulated product platform through leveraging consumer insights and innovation to deliver best-in-class products. 

Sundial Growers wrapped up the 2021 fiscal year with $56.1 million in revenue for an eight per cent year-over-year decrease. However, according to Gomes’ full report from March 31, he expects those numbers to go up moving forward, projecting the company’s revenue to skyrocket to $790 million in 2022 before crossing into 10 figures at a projected $1.27 billion in 2023.

Meanwhile, after reporting a $20 million adjusted EBITDA loss in 2020, Sundial wrapped up 2021 with a positive figure of $32.1 million for an implied margin of 57.2 per cent. Looking ahead to 2022, Gomes forecasts an increase in adjusted EBITDA to $52 million, though it comes with a compressed margin of 6.6 per cent. The 2023 forecast tells a similar story, with Gomes’ estimate of $78 million in adjusted EBITDA implying a margin of 6.2 per cent.

Going forward, Gomes believes Sundial’s shareholders have a clearer vision for the company following a letter from Zach George outlining the company’s two-pillar strategy.

“In core cannabis operations, Sundial is focused on improving cultivation efficiency and securing listings and distribution through vertical integration. In investments, Sundial is focused on building an equity and debt portfolio to generate stable cash flows to fund the broader business,” Gomes said. “Looking ahead, Sundial intends to continue expanding its retail network, integrate acquisitions, and rebrand the Company to reflect its new strategic vision.”

Sundial’s stock price has dropped by 20.7 per cent since the start of 2022, though it had momentum as it climbed as high as US$0.81/share on March 25 before falling off again. With his reiterated “Sector Perform” rating, Gomes has maintained a target price of US$0.80/share for a projected return of 50.9 per cent at the time of publication.