Is Decibel Cannabis a buy?

Following the company’s first quarter results, Echelon Capital Markets analyst Andrew Semple remains bullish on Decibel Cannabis, (Decibel Cannabis Stock Quote, Chart, News, Analysts, Financials TSXV:DB).

On May 29, DB reported its Q1, 2024 results. The company posted Adjusted EBITDA of $3.6-million on Net Revenue of $21.0-million, a topline that was down 16%, year-over-year.

“Despite the drop in revenue, we remain one of Canada’s top brands by market share,” CEO Benjamin Sze said. “With a focused effort on our strategy, we expect an improved Q2 and, more importantly, a continued path to sustainable growth and profitability. I am currently undergoing a comprehensive business review and I look forward to sharing the initiatives undertaken before July 15,” said , Decibel’s chief executive officer.

The analyst summarized the quarter.

“Decibel Cannabis Company Inc. reported Q124 results that were below our estimates and the consensus,” he wrote. “Sales faced pressure as competition intensified in the infused pre-roll and vape categories, and as the Company’s international sales declined after a temporary halt to Israeli exports due to issues with a local distributor. Decibel gave back some share in Canada as competitors launched new ready-to-consume (“RTC”) products that adapted to consumer preferences for larger format, higher potency products.”

In a research update to clients May 29, Semple maintained his “Speculative Buy” rating but lowered his price target on the stock from $0.30 to $0.25, implying a return of 257% at the time of publication.

The analyst thinks DB will post Adjusted EBITDA of $17.6-million on revenue of $93.4-million in fiscal 2024. He expects those numbers will improve to Adjusted EBITDA of $20.6-million on a topline of $107.8-million in fiscal 2025.

“We maintain our Speculative Buy rating but trim our price target to $0.25/shr (prev. $0.30/shr) based on a DCF valuation of $0.24/shr (prev. $0.28/shr),” Semple added. “Our DCF valuation moved slightly lower after we reduced financial forecasts following Q124 earnings which fell below our forecasts. Our terminal year FCF multiple moved slightly higher to 12.5x (prev. 11.5x) as we previously assigned a valuation discount to account for the potential Decibel could give back some of its sizable market share gains from the past two years. With some of this impact now reflected in our financial forecasts, we are now increasing our terminal year valuation multiple towards a more normalized level. However, despite our price target and forecast reductions, we continue to view Decibel as substantially undervalued.”