Cannabis stock Indiva is a double, says Echelon

Echelon Capital Markets analyst Andrew Semple is getting positive vibes from Indiva Limited (Indiva Limited Stock Quote, Chart, News, Analysts, Financials TSXV:NDVA), moving the company from a Watchlist item to initiating coverage with a “Speculative Buy” rating and $0.50/share target price for a projected return of 100 per cent on Thursday.

“We view Indiva as an exemplary craft cannabis producer in the Canadian market,” Semple said in his investment thesis. “Its hyper focus on excellence in the edibles category has made it one of the fastest- growing cannabis Licensed Producers (LPs) in Canada over the past year.”

Indiva Limited is a licensed producer of cannabis products in Canada, with a portfolio that includes premium pre-rolls, flower, capsules and edible products. The company also has a number of licensing agreements for Bhang Chocolate, Wana Sour Gummies, Ruby Cannabis Sugar, Sapphire Cannabis Salt, Artisan Batch and other products.

Indiva earned a spot among the top ten licensed Canadian cannabis producers in 2021 and its focus on edibles to this point has led to a roughly 33 per cent market share through March 2022, along with a presence in approximately 75 per cent of Canadian retail cannabis outlets, with Wana Sour Gummies and Bhang Chocolate leading their respective markets at about a 36 per cent share.

According to Semple, Indiva’s success is a testament to the company’s operational efficiency, as it operates out of a single 40,000 square foot production facility.

Indiva has been busy to start 2022, launching the Wana Quick Midnight Berry Indica edible for night-time use, followed by launching Jewels Cannabis Tarts for consumers looking for a microdosing option.

Most recently, Indiva announced a licensing and manufacturing agreement with California-based Dime Industries to expand Indiva’s portfolio to include vape products.

“The pursuit of innovation comes with it the goal of creating products that build on our in-house world-class expertise, as national leaders in edibles, to enable Indiva to, one day, grow beyond our Canadian borders,” said Niel Marotta, President and Chief Executive Officer of Indiva in the company’s April 26 financial results press release. “While in the short-term, licensing deals remain our core revenue contributor, creating the backdrop for our current success, Indiva’s future lies in innovating better products, while continuing to delight our clients and customers.”

Indiva ended 2021 with $35.4 million in revenue for a 119 per cent year-over-year increase, slightly outpacing Semple’s initial projection of $32.5 million. Looking ahead to 2022, Semple forecasts the company to reach $45.8 million in revenue for a potential year-over-year increase of 29.4 per cent, while Semple’s 2023 estimate is set at $64.7 million for a potential year-over-year increase of 41.3 per cent.

From a valuation perspective, Semple forecasts the company’s EV/Sales multiple to drop from his estimated 1.8x in 2021 to a projected 1.3x in 2022, then to a projected 0.9x in 2023 to come in at a discount to the target of 1.6x.

Meanwhile, Indiva got close to breaking even on adjusted EBITDA, though the reported $0.3 million loss for 2021 coming in ahead of Semple’s $0.1 million loss projection. Nevertheless, Semple projects a positive turn for 2022 at a projected $1.8 million for an implied margin of 3.9 per cent, followed by a 2023 estimate of $7.7 million for an implied margin of 11.9 per cent.

In terms of valuation, Semple introduces an EV/EBITDA multiple in 2022 at a projected 31.7x before dropping to a projected 7.6x in 2023, which would mark a significant discount to the 13.1x target.

The company’s gross margin came in at 30.6 per cent for 2021, roughly in line with Semple’s 31 per cent estimate. Looking ahead, Semple forecasts the margin widening to 35 per cent in 2022, then to a projected 38 per cent in 2023 to validate Semple’s initial monitoring while Indiva was on the watchlist.

“We now view there to be sufficient evidence for us to believe that Indiva’s new higher (30%+) gross margin level is sustainable, that it can maintain significant market share within edibles despite competition, and that we are increasingly confident it is amongst the structurally better positioned operators in the Canadian cannabis industry,” Semple said.

In addition, Semple also watched Indiva closely due to potential M&A considerations, and now believes it could be a prime target for another company.

“It has won market share organically for several years, and yet trades at a steep discount to large cap peers that have lost market share,” Semple said. “This disconnect creates a ripe environment for M&A, which should support Indiva’s valuation as it continues to demonstrate growth momentum.”

Indiva’s stock price has dropped to a 27.1 per cent loss since the start of 2022, with an early peak of $0.38/share coming on January 6. However, the stock has steadily declined since then, resting at $0.25/share for the majority of the past week.