Analyst: Possibilities Endless For Sundial As Canadian Cannabis Retail Consolidates

On Friday, Sundial Growers Inc.’s SNDL stock surged on reporting net earnings of CA$11.3 million ($9 million) in the third quarter of 2021 and positive adjusted EBITDA of CA$10.5 million.

The latest earnings report follows two major deals that the Calgary, Alberta-based company either announced or wrapped up.

In July, Sundial acquired Inner Spirit Holdings, known for its national network of Spiritleaf retail stores, only to reveal that it is also purchasing Canadian liquor retailer Alcanna Inc. for roughly $346 million.

Zach George, Sundial's CEO, says the company’s “financial condition has never been stronger."

“We expect that the achievement of our objectives will result in an aggregate base business that generates free cash flow in 2022," he added.

The company’s stock traded 8.9763% lower at 0.8376 per share at the time of writing Monday.

The Analyst

In his latest note published on Monday, Cantor Fitzgerald’s Pablo Zuanic reintroduced a 12-month price target for Sundial Growers’s stock at US$0.97 after rolling out new pro forma estimates and a sum-of-the-parts (SOTP) valuation approach while remaining Neutral.

The Investment Thesis

Considering the volatility of Sundial Growers, the analyst wondered about the value of investment ratings and price targets.

“While we rate the stock Neutral, on a sum-of-the-parts and pro forma basis (factoring in Alcanna [CLIQ, NC]), we estimate the market is valuing the cannabis piece (ex-retail) at 16x CY22 sales,” the analyst said, highlighting that it is “second only to Canopy Growth Inc. CGC and above Tilray Inc TLRY.”

“Our pro forma estimates factor in the Alcanna deal, the $100Mn share buybacks, and another $200Mn going to the SunStream Bancorp JV,” he further explained.

However, Zuanic does not think the stock is overvalued.

As opposed to Canopy and Tilray being more focused on the US, he views Sundial as “building a bank for US cannabis companies,” a vertically integrated Canadian ecosystem, or a seed-to-sale company that would likely further expand through mergers and acquisitions, as well as use funds to buy back stock when suitable.

The Potential Lies In Retail

While Sundial's management did not shed light on integration plans for Alcanna nor Inner Spirit, which opened 14 stores since July, for a total of 109 stores as of Nov. 9, Zuanic noted that the “possibilities are endless.”

“If Circle-K can add 'cannabis corners,'" he wondered whether Alcanna liquor stores will “someday have their own cannabis corners too.”

Zuanic expects that Canada’s cannabis retail industry will consolidate “with 2-3 players eventually accounting for the lion's share of sales and profits.”

However, on the cannabis production side, the company’s progress is slow, Zuanic said.

Even though Sundial has cut costs and boosted cultivation practices in the third quarter, its efforts in this segment account for about 1% of the overall market on the branded side. In addition, total cannabis sales fell 10% sequentially to CA$8.2 million.

“Given the balance sheet, and management’s assertion previously that US-related investments will be done through the SunStream Bancorp JV (mostly in the form of structured credit for now), we expect acquisitions to be part of the Canadian story,” Zuanic concluded.

Photo: Courtesy of John Schnobrich on Unsplash