Guru Organic has a 71 per cent runway, says Laurentian Bank

Nauman Satti of Laurentian Bank Securities continues to get good vibes from GURU Organic Energy Corp (GURU Organic Energy Stock Quote, Charts, News, Analysts, Financials TSX:GURU), maintaining a “Buy” rating and $16.50/share target price for a one-year potential return of 70.6 per cent in an update to clients on Friday.

Quebec-based Guru Organic Energy sells natural, organic and plant-based energy drinks under the GURU brand, marketing its drinks in Canada and the United States through a distribution network of approximately 21,000 points of sale and through its website.

Satti’s latest analysis outlines the company’s progress, while also serving as a preview to Guru’s second quarter financial results for 2022, to be released on Tuesday, June 14.

“Guru has undergone the first phase of its expansion outside of Quebec as its product roll-out across Canada has largely been completed through a partnership with PepsiCo distributors,” Satti said. “As a next step, we expect an increased advertising budget to build brand awareness across Canada.”

Satti believes the company to have sufficient cash available at $59 million to spend on marketing, though management remains methodical in its brand-building activities.

According to Satti, despite the recent surge in gas prices, management has not seen any material impact on velocity or reduced consumer consumption, pointing to Monster Energy as having historically not had any significant issues when higher gas prices limited discretionary spending. However, Satti also projects price increases beginning with the next quarter to remain in line with its peer group, with the hike expected to be between seven and 10 per cent.

“Although higher fuel prices should result in fewer visits to the C&G channel, the impact of higher fuel prices and reduced spending should not have a major impact on sales based on MNST’s historical trends,” Satti said. “Given the price point for energy drinks, the bulk of consumers are not too price-sensitive, hence branding and advertising play a critical role in velocity.”

Over the course of the second quarter, Guru Organic has been busy from a promotional perspective, initiating a Made With Plants campaign in March along with the national launch of its GURU Guayusa Tropical Punch offering, followed by the announcement of a separate high-energy summer event sponsorship calendar running from May through September.

Most recently, the company announced a sponsorship with CTV’s The Amazing Race Canada featuring numerous activations throughout the upcoming season, along with running an online contest where the winner gets a once-in-a-lifetime trip for two around the world, valued at up to $10,000.

“This is a new way for us to reach a national audience that aligns with our brand’s core values, as we continue to build our profile across the country,” said Carl Goyette, President and CEO of GURU in the company’s May 31 press release. “Partnering with competition reality series has been part of our marketing mix in Quebec for several years, and this strategy has proven highly effective at generating brand awareness and connecting GURU with a key demographic. We look forward to bringing our past learnings to a new platform and a broader market as we aim to create unforgettable and unique experiences for THE AMAZING RACE CANADA teams and CTV viewers, all while sharing our Good Energy.”

Ahead of the upcoming quarterly report release, Satti forecasts $7.9 million in revenue for 13.3 per cent sequential growth and a year-over-year growth of 11.6 per cent, though the number comes in slightly below the consensus projection of $8.3 million. 

However, Satti’s gross profit forecast of $3.9 million is also below the consensus expectation of $4.4 million, with Satti attributing the difference to a larger contraction in gross margin following PepsiCo. Distributors and increased transportation and aluminum prices. Despite those challenges, Satti’s adjusted EBITDA projection of a $3.9 million loss comes in ahead of the $5.1 million loss projection set out by the consensus.

Overall, Satti estimates Guru Organic will bring in $35 million in revenue in 2022 for a potential year-over-year increase of 15.9 per cent, followed by a forecasted 34.6 per cent jump to $47.1 million in 2023.

From a valuation perspective, Satti sees the company’s EV/Sales multiple to be 7.3x in 2022, then dropping to a projected 5.4x in 2023.

Meanwhile, Satti forecasts adjusted EBITDA losses of $16.6 million in 2022 and $4.8 million in 2023.

Guru Organic’s stock price has dropped by 38.8 per cent since the start of the year on the back of macroeconomic challenges and a rising interest rate environment, the risk of liquidity or dilution from potential equity raise is limited over the next 18 to 24 months, and 41.6 per cent over the last 12 months.

The company began 2022 trading at $16/share, though it has had highs and lows since, dropping as low as $9.45/share on March 7.