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Tilray is still a pass, says Haywood

New quarterly results from Canadian cannabis company Tilray (Tilray Stock Quote, Charts, News, Analysts, Financials NASDAQ:TLRY) weren’t enough to move the needle for Haywood Capital Markets analyst Neal Gilmer, who reviewed the stock and company in an update to clients on Thursday.

Leamington, Ontario-based Tilray announced on Wednesday its third quarter fiscal 2022 results for the period ended February 28, 2022, showing net revenue up 23 per cent year-over-year but down two per cent sequentially to $152 million. Gross profit up 31 per cent to $40 million and gross margin was 26 per cent compared to 25 per cent a year ago, while adjusted EBITDA was $10.1 million compared to $9.4 million a year earlier. (All figures in US dollars.)

The company said the quarter showed progress and momentum across all of its key business segments and geographies, with Tilray aiming for $4 billion in annual revenue by the end of fiscal 2024.

“Tilray Medical – which now operates under a cohesive strategy and mission – has a near 20 per cent share in Germany, providing clear benefits in its own right as well as a first-mover advantage that we will leverage as Germany and the EU move towards broader adult-use and medical use legalization,” said Chairman and CEO Irwin D. Simon in a press release. 

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“In Canada, we maintained our leading market share position amid intense competition – and believe that our strong capital position, operational excellence and pricing and marketing adjustments will work in concert to help ensure we reclaim share in the coming quarters. This effort will gain further support from the fundamental appeal of our brands and product innovation which, as stores continue re-opening, will resonate powerfully with consumers,” he said.

Meanwhile in the US, the company said its SweetWater Brewing, Breckenridge Distillery and Manitoba Harvest businesses are all “profitable, growing and emerging as nationwide, iconic brands with loyal followings,” saying that the businesses will be launching THC-based products if and when marijuana legalization comes to pass at the federal level.

The company has had a number of operational advances in recent months, including an exclusive partnership between its hemp-based foods and supplements company Manitoba Harvest and grocer Whole Foods Market as well as a strategic alliance announced last month between Tilray and HEXO Corp, another Canadian LP, involving the restructuring of convertible notes to Tilray worth $211 million and proposed marrying of operations between the two.

“As the global economy re-opens, we are confident that the global cannabis powerhouse at the heart of the Tilray Brands’ value proposition will deliver sustained and tangible shareholder value,” said Simon.

Like the rest of the cannabis space, Tilray’s share price has been on a determined slide over the past year, falling from about $35 per share in February of last year to as low as $5 last month. The stock had picked up some ground more recently but tumbled again on Thursday to sit at about $6.50 per share.

Looking at the quarterly results, Gilmer said while there are promising signs for the company, questions remain about its growth potential.

Gilmer called the fiscal Q3 broadly in line with his expectations, with the $151.9 million in revenue comparing to his estimate at $150.8 million and the consensus at $156.6 million. Adjusted EBITDA of $10.1 million was lower than the analyst’s $11.4 million forecast as well as the $12.2 million call from the Street.

“It was encouraging to see adult-use cannabis revenue above our expectations; however, it was at lower-than-expected gross margins as a result of wholesale discounts in the period. Tilray continues to diversify its revenue base which should drive margin expansion and new growth over the next several quarters,” Gilmer wrote.

Gilmer noted that in terms of the Canadian market share, Tilray maintained the #1 position with 10.2 per cent of the market during its fiscal Q3, although that number was down from the Q2 count of 12.7 per cent — and further, that Tilray’s share reached a reported low of 9.0 per cent for the month of March 2022. 

Gilmer said, “We are encouraged by [Tilray’s] international opportunities, including the transaction with MedMen. However, we remain cautious on the overall Canadian landscape which drives the majority of its revenue growth opportunity in the near-term. As a result, we maintain our Hold rating as we await more evidence on accelerated near-term revenue growth opportunities,” Gilmer said.

With his “Hold” rating, Gilmer also maintained a one-year target price of $7.50 per share, which at the time of publication represented a projected one-year return of zero per cent.

Looking ahead, Gilmer is calling for Tilray to deliver full fiscal 2022 revenue and adjusted EBITDA of $632.6 million and $49.1 million, respectively, and fiscal 2023 revenue and EBITDA of $714.6 million and $73.3 million, respectively.

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