Decibel Cannabis is smoking the competition, Echelon says

Echelon Capital markets analyst Andrew Semple has initiated coverage of Decibel Cannabis (Decibel Cannabis Stock Quote, Chart, News, Analysts, Financials TSXV:DB).

In a research report to clients December 20, the analyst launched coverage of DB with a “Speculative Buy” rating and price target of $0.35, implying a return of 169 per cent at the time of publication.

Semple broke down his investment thesis on the stock.

“Decibel is a Canadian consumer-focused cannabis company engaged in the production, distribution, and retailing of branded products. Decibel is a standout among the publicly traded Canadian Licensed Producers (“LPs”) for its multi-year track record of consistent profitable growth in an industry that has seen many LPs struggle to remain profitable and innovative. The Company recently reported its 13th consecutive quarter of positive adj. EBITDA and 6th consecutive quarter of positive adj. net income. In our view, the Company’s success has been driven by a focused business strategy: 1) prioritize ready-to consume (“RTC”) cannabis products, which are convenient to consumers and are gaining market share, 2) innovate and cater to consumer preferences, an ethos that helped Decibel identify and dominate the infused pre-roll category with an estimated 48% market share while continuing to launch innovative products such as Vox crushable flavoured pre-rolls and Blinker vapes, and 3) scaling operations to meet realistic demand forecasts, which avoids the large inventory write-downs and high unit costs faced by many other Canadian LPs.”

Semple thinks DB will post Adjusted EBITDA of $27.0-million on revenue of $118.4-million in fiscal 2023. He expects those numbers will improve to Adjusted EBITDA of $31.5-million on a topline of $134.8-million the following year.

“Decibel’s successful strategy has catapulted the business to the #2 LP spot in Canada by market share, entirely driven by organic growth,” the analyst added, “Investors have rewarded Decibel with the best-performing share price over the past 12 months of all companies in our North American tracking group of cannabis stocks, with a TTM gain of 44%. We believe there is plenty of room for further upside because Decibel still trades at the lowest EV/2024E EBITDA multiple in our North American tracking group at just 3.1x our 2024 forecast compared to an average 6.2x multiple for small/mid-cap LPs and 15.1x for large cap LPs. In our view, this valuation disconnect makes Decibel stand out as a potential M&A candidate, providing a possible upside catalyst and moderating the downside risk in its shares.”