Nova Cannabis is undervalued, ATB Capital says

One of the largest retail cannabis retailers in the country is undervalued, says ATB Capital Markets.

In a research report to clients on July 12, ATB Capital analyst Frederico Gomes initiated coverage of Nova Cannabis (Nova Cannabis Stock Quote, Chart, News, Analysts, Financials TSX:NOVC) with a “Speculative Buy” rating and a one-year price target of $2.00, which implied a return of 148 per cent at the time of publication.

Gomes says Nova Cannabis has an impressive 80 stores in Canada that operate in the value segment, a strategy he thinks will bear fruit.

“The Company operates the Value Buds banner and offers discount prices on products targeting the value-focused segment of the market. This high-volume, lowcost strategy is seen in NOVC’s financials, which reflect one of the highest sales per store (over 50% above peers) in the sector,” the analyst noted. “Sundial is a strategic partner and owns 63% of NOVC’s common shares. We believe NOVC will continue rolling out its disruptive low-cost model to grow sales and expand margins as the retail competitive environment normalizes. In our view, the stock is undervalued relative to its competitive position and growth potential, and it offers an attractive risk-reward profile for investors.”

The analyst thinks NOVC will post Gross Profit of $41.1-million on revenue of $216.8-million in fiscal 2022. He expects those numbers will improve to Gross Profit of $58-million on revenue of $275.5-million the following year.

Gomes says NOVC’s model is to first grow sales, then expand its margins at a later date.

“As NOVC rolls out stores through Canada, we expect margins to expand (we forecast a ~300 bp gross margin improvement from 2022 to 2024) through scale advantages as the Company benefits from shared infrastructure, consumer data access, relationship development through loyalty programs, and (depending on provincial regulations) exclusive deals with LPs for private-label products,” the analyst added.

Gomes adds that NOVC has a value-focused strategy with the support of Sundial Growers, which owns 63% of NOVC’s common shares. He says he sees a “credible path” to growth, but cautions that the company will need more capital, something that Sundial could be instrumental in. Nonetheless he says the stock is currently trading at an attractive valuation, especially in relation to its cannabis peers.