Indiva downgraded at Echelon

Regulatory headwinds have Echelon Capital Markets analyst Andrew Semple downgrading Indiva (Indiva Stock Quote, Chart, News, Analysts, Financials TSXV:NDVA).

On April 2, NDVA issued a corporate update, noting that it would pay down $2.0-million in debt and that the company would explore strategic alternatives.

The analyst says his mind was not on the company’s update, but on a development that is out of its control.

“First, we believe the most material update in recent weeks was that Health Canada did not recommend increasing the THC limit on edibles, going against the previous recommendation of the Competition Bureau and frustrating industry lobbying efforts,” Semple wrote. “We viewed the lack of a push on edibles regulatory reform as a disappointment, reducing the likelihood of a near-term catalyst event for Indiva’s stock. Over the long-term, we still believe there is potential for Health Canada to revisit this decision, but timing for this potential reform now becomes uncertain. This had a negative impact to our assessment of the risk/reward balance in Indiva’s stock, and is a major driver behind our updated rating recommendation.”

In a research update to clients April 2, Semple downgraded NDVA from “Speculative Buy” to “Hold” and cut his price target on the stock from $0.15 to $0.12.

Semple thinks NDVA will post Adjusted EBITDA of $4.9-million on revenue of $43.1-million in fiscal 2024.

The analyst commented on what he thinks will happen with the company’s strategic review.

“The strategic review is expected to consider financing alternatives, a merger, amalgamation, plan of arrangement, consolidation, reorganization or other similar transactions,” he said. “In our view, the most likely outcome of this review would be Indiva being acquired by a larger Canadian LP looking to bolster their market share in edibles, or the Company being taken private by a financial buyer. We now believe there is risk of Indiva being taken private or merged this year before existing shareholders recognize the full value of its industry leading branded edibles products reaching mature run-rate revenues. Alternatively, if a strategic transaction does not materialize, this process also raises the possibility of a financing transaction at a lower share price, which could be dilutive to existing shareholders. Due to these factors and with the stock last trading at $0.08/shr, it may be difficult for Indiva shares to recognize our DCF value of $0.19/shr due to Indiva being unlikely to receive a large premium in a merger/takeout (due to a multi-year period of tight capital conditions, we expect potential strategic partners to be timid).”