NDVA stock upgraded at Echelon

Following the company’s third quarter results, Echelon analyst Andrew Semple has upgraded cannabis player Indiva (Indiva Stock Quote, Chart, News, Analysts, Financials TSXV:NDVA).

On November 21, Indiva reported its Q3, 2023 results. The company posted EBITDA of $700,000 on Gross Revenue of $10.9-million, a topline that was up 23.7 per cent from the same period last year.

“We are delighted to announce the best financial results in Indiva’s corporate history, driven entirely by organic growth, including record net revenue, record gross profit and gross margin, as well as positive EBITDA [earnings before interest, taxes, depreciation and amortization] and positive income from operations,” CEO Niel Marotta said. “Results benefited from the introduction and initial sales of No Future gummies and vapes, purchase orders of Wana gummies under our contract manufacturing agreement, and continued growth in Pearls by Gron gummies. We are very pleased with the growth in the Pearls gummy brand since the product first hit shelves in Canada in September, 2022, as Pearls is now the No. 1 gummy in Ontario and British Columbia, and is quickly gaining market share in Alberta. Additionally, total purchase orders received since inception in July, 2023, for No Future gummies have now exceeded 1.3 million units, marking one of the fastest-growth trajectories of any new product introduction in Indiva’s history. We continue to urge regulators to increase per-package THC [tetrahydrocannabinol] limits on legal edibles so we can, as an industry, eliminate public safety risk by providing a safe, legal, competitive alternative to illegal copycat edibles. Until that day comes, Indiva will continue to leverage its robust new-product pipeline and position as the largest, low-cost producer of edibles in Canada, as we continue to delight of-age consumers with the quality and innovation we are known for.”

Semple says there was a lot to like about the quarter.

“Sales were well above our expectations with growth of 30% q/q, driven by strong traction with its market-leading Pearls by Grön products and other newly launched brands,” he wrote. “Automation of production lines supported new product launches while simultaneously driving cost efficiencies, which bolstered the bottom line. This helped Indiva to move firmly into positive EBITDA for the quarter. We view the adj. EBITDA print of $1M in the quarter as reaching a level which can support roughly breakeven levered FCF. This was much quicker than we were expecting, with our prior forecast calling for Indiva to reach breakeven FCF in 2025.”

In a research update to clients November 21, Semple upgraded NDVA from “Hold” to “Speculative Buy” and raised his price target on the stock from $0.10 to $0.13, implying a return of 100 per cent at the time of publication.

The analyst believes Indiva will post Adjusted EBITDA of $1.7-million on revenue of $36.3-million in fiscal 2023. He expects those numbers will improve to Adjusted EBITDA of$3.7-million on a topline of $40.4-million the following year.

“Our DCF improved meaningfully after we increased financial forecasts following the strong Q323 earnings beat and with better clarity on future growth from Indiva’s core brands,” he concluded. “Our 2024 EBITDA forecast increased by 54%, and our longer-term EBITDA estimates increased by more than 40% for the remainder of our forecast horizon (to 2027). Combined with Indiva’s balance sheet leverage, this resulted in a material improvement to our DCF-based equity value. Partially offsetting this, we lowered our terminal year FCF multiple to 15.0x (prev. 17.5x) as our forecasts now better incorporate the Company’s spare facility capacity to deliver strong organic growth, and we raised our discount rate to 13% (prev. 12%) due to higher interest rates. Had we not changed our valuation parameters, our DCF valuation would have moved to $0.22/shr due to changes to our financial forecasts. We note that our price target of $0.13/shr is below our DCF value by 25%. We believe it was prudent to introduce a 25% haircut to our DCF valuation to reflect the risk still present in the Company’s balance sheet and liquidity situation. However, if Indiva navigates through these risks over the next 12 months and delivers on our forecasted financial results, our DCF valuation suggests there is room for further upside potential to our price target.”