Tilray's Growth In Export Business 'Positively' Impresses Analyst, Maintains Overweight

In a recent analyst note, Pablo Zuanic from Cantor Fitzgerald offered an updated investment model for Tilray Inc. TLRY in which he maintained an Overweight but lowered the price target for the stock to $6.90 from $7.40 on reduced estimates.

The Thesis

“We attach our updated model after talking to management and the release of the 10-Q for the Nov quarter. Conditions in the domestic Canadian recreational market remain challenging, with market share erosion and wholesale destocking leading to a 30% sequential drop in reported sales,” Zuanic noted.

The analyst also highlighted that even though the new estimates reflect less bullish market share assumptions, “the company is implementing several adjustments that should reverse the market share slide.”

Zuanic added that Cantor was still impressed with Tilray's growth.

“Maybe, more importantly, we were positively impressed with the company’s sequential growth in the export business (~40%), generating $7.8 million in sales. As European countries start to legalize cannabis in the next few years (Germany by late 2023?), we believe TLRY is well-placed given its production and distribution infrastructure and established brands (especially in med tinctures).” 

Projections And Outlook Post 2Q In 2022

Although the company does not provide guidance, Zuanic noted that management is confident in sequential growth for the recreational cannabis sector in the February quarter. “In the short term, price cuts in pre-rolls and vape should drive growth,” Zuanic said, highlighting the "feet on the street" initiative to work with bud-tenders.

According to Zuanic, management acknowledged expecting “an industry shake-out,” given market saturation.

“Several operators are having to shed inventory, often selling below cost. There were 157 new brands introduced in 2021 (another sign of market dilution).” Market prices fell by about 22% over the last 12 months compared with less than 2% for Tilray, thus Zuanic considers that the cannabis company is “in a stronger position cost-wise, including synergies.”

Exports grew sequentially to $13.7 million from $10.3 million in the August quarter. “We model $12 million for the Feb quarter,” the analyst said.

“Tilray is now shipping to 20 different countries, with Germany being a key market. It is #1 in the German medical market with ~20% share (64% in extracts, 16% in flower). As markets in Europe legalize (this could take time, but management thinks German recreational sales could begin by late 2023), we believe TLRY should be well-placed given its production and distribution infrastructure and established brands (especially in tinctures),” Zuanic concluded.

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