2023-11-18 02:04:56 ET
Summary
- SNDL Inc. showed improvement in Q3-2023 with higher revenues, higher margins, decreased net loss, and positive free cash flow.
- The company's stock price is undervalued compared to its cash on hand and long-term investments.
- The cannabis sector is undergoing weak investor sentiment and SNDL Inc.'s stock has been on a one-year downtrend.
- I continue my rating of hold for SNDL Inc. and recommend that investors watch the sector.
SNDL Inc. ( SNDL ) showed some improvement in its financial performance for Q3-2023. The company reported higher revenues from cannabis retail sales and operations, as well as higher margins. Its net loss also decreased and the company reported free cash flow. SNDL Inc. is positioned for US legalization through its SunStream Bancorp joint venture.
As with other Canadian cannabis LPs, SNDL Inc. is undervalued and undergoing bearish market condition. Its improved financial performance will not be enough to cause a new uptrend in its stock price. The last time I covered SNDL Inc., I rated the company as a hold and I reiterate that rating now, after Q3-2023 earnings. The stock price has increased 7.25% since my last coverage. I maintain a hold rating because the company has value in its future growth and it is well positioned for this growth.
It is unclear when the SAFER Banking Act will be passed and when cannabis will be rescheduled. Until these items occur, cannabis stocks will remain on the downtrend and high risk. Greater stock market volatility will continue to affect cannabis stocks. If these pivotal events occur, then SNDL Inc. will experience a rally and its stock price may stabilize at higher price channels. It is important to watch developments about the cannabis sector and the company.
Improved Financial Performance
SNDL Inc. reported revenues of US$174.9 million, representing a 4.82% increase YoY and a 5% increase from the last quarter. The company reported a net income of negative $16 million, representing a 77% decrease YoY and a 34% decrease from the previous quarter. The decrease shows that operations are improving.
The company reported positive free cash flow of CA$16.5 million compared to negative CA$67.1 million YoY. Its adjusted EBITDA of CA$16.1 million has decreased YoY compared to CA$18.3 million. The company attributes this decrease to inventory impairments.
Below is a chart of the company’s earnings over the last five quarters.
US$ Millions* | Q3-2023 | Q2-2023 | Q1-2022 | Q4-2022 | Q3-2022 |
Revenue | 174.9 | 166.5 | 149.8 | 177.6 | 166.9 |
Cost of Revenue | 139.1 | 127.3 | 125.7 | 145.4 | 130.5 |
Profit | 35.8 | 39.2 | 24.1 | 32.2 | 36.4 |
Gross Margins | 20.5% | 21.2% | 16.1% | 18.1% | 21.8% |
Operating Expenses | 53.4 | 56.0 | 52.4 | 52.8 | 43.7 |
Net Income | (16.0) | (24.5) | (26.3) | (92.9) | (71.0) |
Receivables | 21.4 | 27.4 | 27.6 | 19.5 | 16.1 |
Current Assets | 312.0 | 347.0 | 364.7 | 370.4 | 380.9 |
Long-Term Investments | 426.7 | 409.5 | 403.9 | 450.5 | 465.8 |
Total Assets | 1,151.0 | 1,186.5 | 1,197.0 | 1,151.7 | 1,315.9 |
Payables | 42.1 | 47.2 | 46.0 | 7.2 | 30.2 |
Short-Term Liabilities | 72.0 | 77.4 | 74.5 | 66.0 | 57.4 |
Long-Term Liabilities | 178.1 | 184.1 | 183.9 | 171.1 | 230.8 |
Cash & ST Investments | 151.4 | 160.1 | 182.9 | 227.5 | 235.7 |
Financial Data from Seeking Alpha
The company is overall reporting higher revenues. SNDL Inc. has expanded its operations into liquor retail and cannabis retail, but it comes with a higher cost of revenue and higher operating costs. The company has ongoing re-structuring goals for bringing down costs. It uses its POS software to find the best and most profitable SKUs. It also has solidified its cannabis grow and manufacture operations. If the company reports net income instead of net loss in the future, then it will be considered significant improvement.
Segment Performance
SNDL Inc. reports its revenue from four operating segments: liquor retail, cannabis retail, cannabis operations, and investment operations.
Revenue in CA$ Millions | Q3-2023 | Q2-2023 | QoQ | Q3-2022 | YoY |
Liquor | 151.801 | 151.690 | 0.07% | 152.488 | -0.45% |
Cannabis Retail | 75.539 | 71.881 | 5% | 66.202 | 14.1% |
Cannabis Operations | 20.954 | 20.940 | 0.07% | 11.810 | 77.4% |
Source: Q3-2023 and Q2-2023 Earnings Releases
Retail liquor revenues of CA$151.8 million showed little gain YoY and QoQ. The company reported better margins due to sales of its private label sales. Private label sales increased 33% YoY. The company will introduce its own private label wine during Q1-2024. SNDL Inc. currently operates 170 liquor retail locations (138 Ace Liquor, 20 Liquor Depot, 12 Wine and Beyond). The company has plans to open a new liquor location in Alberta, which will generate an estimated CA$7.6 million in annual revenue. The store will open during Q1-2024.
Cannabis retail revenues of CA$75.5 million have increased 14.1% YoY and 5% QoQ. The company reported higher margins for its cannabis retail operations, up 21.9% YoY and 12.4% QoQ. The company credits its new data crunching programs for the improvement. It currently operates 186 cannabis retail locations (Value Buds 92x, Spiritleaf 22x corporate + 65x franchise = 87, Superette 5x, Firesale Cannabis 2x). The company reports an increase of 3.9% in same-store sales. The increase in revenue may indicate a higher demand for cannabis in Canada.
Cannabis operations revenues of $21 million represents a 77% increase YoY and a slight increase QoQ. Gross margin for this segment was negative CA$8.7 million due to inventory impairment. The company has plans to further improve cannabis operations. It has consolidated its cultivation activities and centralized its manufacturing, processing, and production activities. The company is optimizing its manufacturing and retail sales of certain products (SKUs) for better margin growth.
The company’s investment revenue is not reported under revenues, but rather under earnings from continuing operations. As of Q3-2023, the company has invested CA$583 million in cannabis capital. Of the total, CA$550.5 million is invested with SunStream Bancorp. SNDL Inc. generated CA$3.3 million in interest and fee revenues for the quarter. Fair value increased $6.6 million totaling CA$10 million in revenue from the investment portfolio.
The SunStream investment contains five companies: Jushi Holdings ( JUSHF ) , SKYMINT Brands, Ascend Wellness Holdings ( AAWH ), Suterra Holdings (d/b/a Parallel), and Columbia Care (OTC:CCHWF). A new SunStream USA entity is being created and approved, which will hold assets related to US cannabis operations. It seems that the venture is already collecting cannabis assets besides funding cannabis businesses.
Stock Price Downtrend
1-year stock price performance from StockCharts.com
SNDL Inc.’s stock price has been on a one-year downtrend. It is down 44.80% over one year and down 31.6% YTD. It is currently trading below its 20/50/200 moving-day averages. The stock is currently undergoing a short squeeze, with 99% of its outstanding shares on float. The stock price has still not recovered from its reverse split. The stock rallied in September over news of rescheduling and the Safer Banking Act, but has since then continued to find lower price channels. There is a risk that the stock price will drop further.
Undervalued Stock Price
SNDL Inc. said during its Q3-2023 earnings call that the company’s stock price is currently undervalued compared to its cash on-hand and long-term investments, equaling around US$578 million. SNDL Inc. maintains that the market is ascribing negative value to the company’s growth. The company’s stock has been on a perpetual downtrend along with all other cannabis stocks and cannabis support stocks.
The company estimates that its potential revenue in the future will be above CA$1 billion or US$729 million per year. Over the last four earnings reports, SNDL Inc. has reported a total of US$641.8 million in revenues.
Below are some valuations of SNDL Inc.
US$ Dollars | Current | Q3-2023 | Q2-2023 | Q1-2022 | Q4-2022 | Q3-2022 |
Price | 1.50 | 1.90 | 1.37 | 1.60 | 2.09 | 2.18 |
Total Enterprise Value ((MM)) | 379.86 | 479.81 | 318.48 | 416.13 | 487.91 | 456.68 |
Market Cap ((MM)) | 390.73 | 494.87 | 356.55 | 422.72 | 494.49 | 518.82 |
NTM Total EV / Revenues | 0.56x | 0.61x | 0.41x | 0.57x | 0.68x | 0.64x |
Book Value Per Share | $3.68 | $3.79 | $3.84 | $4.10 | $4.41 |
Valuation data from TIKR
The current street target values the stock price around $4.48 per share. This would require a rally of nearly 200% in stock price. It is unlikely that the stock price will increase to its target. I think $2.50 is a more realistic target for the stock price over the next twelve-months, unless pivotal events occur.
Currently, the company remains undervalued according to its forward estimates and its book value per share. Investor sentiment is weak on the cannabis sector and it is unclear when things will change. Cannabis markets in Canada have added additional pressure for the financial performance of Canadian LPs.
SNDL Inc. valued itself in its Q3-2023 earnings report as having CA$785 million in short and long-term cash and investments and having a net book value of CA$1.3 billion. The company’s current market cap and total EV do not reflect its underlying value. The company has no debt.
The company’s future performance and valuation are dependent on potential changes in the Canadian and American cannabis markets. For SNDL Inc to bring in more revenue, the demand for cannabis and liquor in Canada must increase. Otherwise the company must perfect and make more efficient its current operations. For the company to experience growth in American markets, it will need full legalization to occur. The company is currently positioned to benefit from growth in Canadian markets or changes in American ones.
Investment Strategy and Risk
The company has low risk of liquidity. SNDL Inc.’s operations are set to grow and the company has plenty of assets to continue its business strategy. There is medium risk in holding the company’s stock due to greater market volatility and wear investor sentiment in the cannabis sector.
If pivotal events happen in the US concerning cannabis, then SNDL Inc.’s stock price will rally and uptrend. The valuation of the company merits a higher stock price and so it may stabilize at higher price channels in the future. For this reason, I give the company a rating of a hold. As financial performance improves or market conditions improve, then a buy rating will return.
Conclusion
SNDL Inc. has reported improved financial performance. The company has increased its revenue and margins, while decreasing its net loss. SNDL Inc.’s stock price is undervalued and the situation may remain this way since the cannabis sector is undergoing weak investor sentiment. Greater stock market volatility will continue to batter down SNDL Inc.’s stock price. The cannabis sector awaits for US government cannabis reform. Until these events occur, I rate SNDL Inc. as a hold.
For further details see:
SNDL Inc. Reports Better Financial Performance For Q3 Yet Remains Undervalued