| Delta 9 provided revenue guidance of $5.4-5.8 million for Q1/19, which was in line with our $5.8M estimate and 2-9% above Q4 revenues of $5.3M. The company plans to release full financials on May 30, 2019 after markets close with a conference call scheduled for 9:00 a.m. ET the following morning (1-888-886-7786). While our top-line estimates are in line, we will be watching for details surrounding the company's revenue mix, average pricing and sales volumes to assess potential read-throughs from the quarter. Q1 preview - Our Q1 revenue estimates account for ~$2M in wholesale sales, $3.3M in retail revenues and $0.5M in B2B and other sales. While a quarterly breakdown was not provided for Q4, based on our estimates, we are expecting a modest uptick in wholesale revenues, offset by a slight reduction in retail sales.
- On its Q4 conference call, management noted that it expects gross margins to improve QoQ owing to efficiency improvements and a shift in its revenue mix toward higher-margin wholesale sales. Correspondingly, our Q1/19E adj. gross margin estimate of 34% (at ~$2.0M) is well above the 25% reported in Q4/18.
- In our view, the company's strategic partnership with Auxly Cannabis Group (XLY-TSXV | Not Rated) could impact the quarter given the unknowns surrounding commercial terms and quarterly volume allocations. Recall, in September 2018, Auxly invested $16M in Delta 9 in exchange for the right to purchase 1,000 kg/year of dried flower starting January 1, 2019, increasing to 5 tonnes/year by July 2020. While management noted a Q4 average wholesale price of ~$8/gram, we are projecting average prices of $5.90/gram with the onset Auxly sales; in total, we expect Auxly sales to make up 20-25% of our 2019 wholesale volumes of 4,500 kg.
- On the retail side, Delta 9 reported industry-leading daily retail sales of ~$47,000 in Q4. We believe sales will moderate in Q1 and estimate retail sales of $31,000/day. As this remains above the industry average, we believe there is a risk to our estimates.
- For a full overview of our Q1 estimates and recent operational updates, we direct readers to our April 25, 2019 note.
Valuation. We value Delta 9 using a SOTP DCF model, where we apply an average WACC of ~13% and 2.0% terminal growth rate to arrive at a value of $2.17/sh. Based on our estimates, Delta 9 is trading at a 2020E EV/EBITDA multiple of 5.9x, versus our target multiple of 8.8x. We maintain our SPEC BUY rating given the company's attractive valuation, ongoing wholesale and retail ramp-ups, pending Health Canada licensing approvals and planned EU-GMP certification. We note that while management is evaluating a large expansion to 66,000 kg/year, our target includes only the ~17,000 kg/year that is fully funded. |