Nova Cannabis is a “Top Pick”, says ATB Capital

Calling the retail sector largely undervalued, ATB Capital analyst Frederico Gomes named Canadian cannabis retailer Nova Cannabis (Nova Cannabis Stock Quote, Charts, News, Analysts, Financials TSX:NOVC) his top pick in the space in a recent report. Gomes sees a path to margin expansion for Nova as the field of players thins out and Nova leverages its relationship with cannabis producer Sundial on higher-margin private label products.

Nova Cannabis, which has the Value Buds line of cannabis stores in Alberta, Ontario and Saskatchewan, has seen its share price drop sharply over 2022, going from $2.81 to start the year to now in the $0.55-$0.70 range, as the cannabis space remains out of favour with the market and investors.

But Gomes is expecting better times ahead for NOVC, maintaining in a recent update a “Speculative Buy” rating and $1.60 target price, which at the time of publication represented a projected return of 139 per cent. 

Gomes sees a long runway for Nova to expand its presence in the cannabis landscape.

“NOVC is one of the best and largest retail operators in Canada. The Company has been consistently gaining market share due to the success of its discount strategy with the Value Buds banner. We believe NOVC has sufficient access to capital due to its strategic relationship with [Sundial], which should support continued brick-and-mortar expansion, especially in Ontario. In terms of geographical exposure, NOVC is concentrated in AB and ON, but we view opportunities for expansion to other markets, notably BC, SK, and MB,” Gomes wrote in his report, as published in the Globe and Mail on Tuesday.

Nova delivered record quarterly sales of $58.9 million in its most recent quarter, the company’s Q3, reported in November. The topline represented a year-over-year increase of 52.4 per cent and a sequential uptick of 4.6 per cent. Nova also increased its store count by five over the quarter to 85 stores and increased its market share in Alberta from 18.9 per cent to 21.5 per cent and in Ontario from 2.1 per cent to 2.9 per cent.

“We see large upside, as the stock trades at an extremely attractive valuation,” said Gomes. “Despite NOVC being one of the leading retailers in Canada, the stock trades at 2024 EV/Sales and EV/EBITDA multiples of 0.1x and 1.4x (excluding leases), respectively, which are large discounts to our sector valuation multiples of 0.6x and 12.6x.”