Though he sees a significant opportunity for growth when retail stores, particularly in Ontario, reopen from pandemic-related closures, Raymond James analyst Rahul Sarugaser lowered his rating for Rubicon Organics Inc. (ROMJ-X) after its first-quarter results fell short of expectations.
Before the bell on Tuesday, the Vancouver-based company reported revenue of $4.1-million, narrowly below both the analyst’s $4.3-million estimate and the consensus projection on the Street of $4.8-million. An EBITDA loss of $3.4-million missed forecasts (losses of $1.0-million and $1.5-million, respectively) by a wider margin.
“The Canadian cannabis sector’s 1Q21 (Jan. 1 to Mar. 31, 2021) sales were attenuated by significant COVID-19 retail store closures in many of Canada’s most important provincial cannabis markets,” said Mr. Sarugaser. “Total Canadian adult-use cannabis sales dropped 11 per cent between Dec. 2020 and Feb. 2021, then recovered through Mar. and Apr. 2021. Concomitantly, ROMJ’s revenue declined 15 per cent quarter-over-quarter, which does not come as a surprise given our view that retail shutdowns affect premium quality cannabis products more than those focused on deep value (see below). Given that Canadian lockdowns have persisted well into 2Q21, we anticipate ROMJ’s sales continuing to be light during the next 1-2 quarters; ROMJ management has proactively undergone some restructuring—achieving $2.6-million in annualized savings; realized 3Q21 onward—in light of this uncertainty and has pushed off previous guidance of achieving positive EBITDA in 2Q21 to 3Q21 (we estimate 4Q21, with the timing of store-openings being the x-factor).”
Mr. Sarugaser emphasized lockdowns have hurt results, however the issuance of new retail licenses has not slowed recently, noting 175 of 675 Ontario stores have yet to open their doors.
“There will be approximately 500 stores in ON that will shift from holding zero inventory to being fully stocked,” he said. “500 stores that have never ordered cannabis inventory before.”
“The bolus of orders from these brand-new retailers (via the OCS) will, in our view, be gigantic. Should ON re-open retail shopping in mid-June, the larger LPs—presumably receiving large orders — would need to begin their inventory packing now, risking having their products age out and being returned/rejected. Smaller, more agile LPs like ROMJ have the capacity to turn orders around quickly, and importantly, to ensure the quality and freshness of its products. With so many new retail doors opening during the next few quarters in ON alone, a quality and fulfillment-conscious company like ROMJ that can nimbly serve the country’s largest cannabis market — during what will surely be a logistical nightmare for the OCS — has before it a gigantic opportunity to seize market share. We believe ROMJ is situated well to grab an outsize share of this oncoming sales bolus.”
Despite also pointed to its continued market share leadership of the premium cannabis segment, Mr. Sarugaser downgraded Rubicon shares to “outperform” from “strong buy” until lockdown measures ease. His target for its shares fell by $1 to $5, remaining higher than the $4.50 average on the Street.
Elsewhere, Desjardins Securities’ John Chu cut his target to $4.50 from $4.75, maintaining a “buy” rating.
“Despite soft 1Q sales (down 14 per cent quarter-over-quarter), ROMJ fared much better than most of its peers (down 20–30 per cent quarter-over-quarter), which we believe reflects its focus on the premium/super-premium segment as well as its high-quality products,” said Mr. Chu. “While we expect industry headwinds to continue to weigh on the sector, ROMJ should be better positioned to weather the storm and in a stronger position when the market rebounds.”