SNDL is Canada’s most compelling cannabis idea, says ATB Capital

ATB Capital Markets analyst Frederico Gomes reported on Tuesday on Calgary-based cannabis name SNDL Inc (SNDL Inc Stock Quote, Charts, News, Analysts, Financials NASDAQ:SNDL), saying the company offers investors the most compelling risk-reward option in the sector.

Formerly Sundial Growers, SNDL is a small-batch licensed producer with indoor grow facilities and a “craft-at-scale” modular growing approach. The company has a portfolio of brands including Top Leaf, Sundial, Palmetto and Spiritleaf along with cannabis and liquor retail stores. In March of this year, Sundial acquired Western Canada-focused cannabis retail chain Alcanna.

On Monday, SNDL announced the results of a special shareholder meeting where three resolutions were approved: a one-for-ten share consolidation, a rebranding of the company from Sundial to SNDL and an authorization for SNDL’s Board to potentially distribute equity in Nova Cannabis (Nova Cannabis Stock Quote, Charts, News, Analysts, Financials TSX:NOVC) to SNDL shareholders (Sundial is a strategic partner in Nova, which is one of the largest cannabis retailers in Canada with 80 stores presently).

On the share consolidation, executed to guarantee compliance with NASDAQ listing requirements, SNDL now has 238.0 million shares outstanding compared to 2.4 billion before and puts the current share price at around US$2.30 per share. On the branding, management said it would provide an update on how that’s going with the company’s next quarterly earnings in August. 

As for the Nova share distribution, Gomes wrote, “In our view, this resolution provides SNDL with optionality to navigate regulations (Ontario precludes LPs from owning more than 25 per cent of a cannabis retailer) and unlock shareholder value through a potential distribution. We believe SNDL’s strategy remains unchanged, as the Company looks to build a dominant retail platform in Canada and continues to act as a sponsor and supporter of NOVC.”

Gomes said one of SNDL’s strengths from an investor point of view is that it offers exposure to the entire value chain of Canadian cannabis and liquor retail in Western Canada. 

“While the story has been hard to follow due to SNDL’s rapid transformation, we believe the picture will become clearer from Q2/22 onward as fully-consolidated results (including Alcanna and NOVC) are reported. As of last quarter (here), we estimated SNDL had ~US$3.12 per share (fully diluted and post-consolidation) in net cash and investments,” Gomes said.

“While this calculation may have to be updated by the cash used and the changing value of investments (including the potential acquisition of the business and assets of Zenabis, here) since last quarter, we believe the market is attributing little to no value to SNDL’s Canadian cannabis and liquor retail operations, offering downside protection and compelling upside from current levels,” he wrote.

Along with the rest of the cannabis sector, SNDL’s share price has been dropping for over a year and a half. Year-to-date the stock is currently down 62 per cent.

But Gomes sees upside to SNDL, reiterating in his report an “Outperform” rating and US$8.00 target (previously US$0.80 pre-consolidation). At the time of publication, his target represented a projected one-year return of 251 per cent.

SNDL last reported earnings in May where the company’s first quarter 2022 featured net revenue of $17.6 million compared to $9.9 million a year earlier. The company’s Q1 net loss was $38.0 million compared to a loss of $134.4 million a year earlier with a net loss per share of $0.02 compared to a loss of $0.09 per share a year earlier. (All figures in Canadian dollars except where noted otherwise.)

Sundial’s first quarter was highlighted by the Alcanna acquisition for $320 million in cash and shares at the end of March. One of the largest private-sector alcohol retailers in North America and the largest in Canada by store count, Alcanna was also a majority owner in Nova Cannabis. Sundial reported that on its own, Alcanna’s revenue for the first quarter was $162.5 million with a gross margin of about $36.3 million. 

Looking ahead, Gomes is estimating SNDL’s revenue to go from $56 million in 2021 to $735 million in 2022 and then to $1.073 billion in 2023. He sees the company’s adjusted EBITDA going from $32 million in 2021 to $17 million in 2022 to $77 million in 2023.

Sundial CEO Zach George commented in the company’s Q1 press release that the first quarter was both transformational and transitional for the company.

“We are now Canada’s largest private sector distributor of both liquor and cannabis with 354 retail locations and have quickly benefitted from collaboration with our new legacy Alcanna colleagues,” George said.

“Sundial’s debt-free balance sheet and ample cash reserves place us in an enviable position as we witness a reckoning taking hold in the Canadian cannabis market. Continued aggressive cash consumption by our peers, reduced access to capital, and waning investor risk appetite is likely to accelerate sector rationalization as the industry slowly moves towards the formation of an oligopoly,” he said.