Canaccord Research Note
Canadian Cannabis | Research Alert Health Canada approvals received Delta 9 Cannabis, Inc (NINE-TSXV: C$1.41) Speculative Buy; C$2.20 Target Kimberly Hedlin, CPA, CMA | Canaccord Genuity Corp. (Canada) | khedlin@cgf.com | 1.403.508.3854 Delta 9 announced that it has received Health Canada approvals to place 48 new Grow Pods from its Phase II expansion into production. The company is currently working to place 36 flowering pods and 12 support pods into production, which would bring its total count to 202. Management estimates that the expansion will add an additional 1,150 kilograms per year of dried cannabis flower production, bringing the overall anticipated production capacity to 5,350 kilograms per year. Our take: operations remain on track Overall, we believe the company remains on track to meet our 2019 estimates given the recent approvals. We were forecasting that an additional 85 Grow Pods would be commissioned by the end of Q2/19 (roughly equivalent to 2,700 kg/year). While the pod count was below our forecasts, HC approval timelines were ahead of our expectations, which we view as the more important take-away. Outside of cultivation, other growth initiatives include partnerships with a local brewery, NanoSphere Technologies, Pharmasave and B2B buyers. Additionally, the company continues to execute well on its Manitoba retail operations with plans to expand into new provinces. Delta 9 continues to add automation and believes it should reduce its average cost to roughly $1/gram as it scales up. We are also expecting announcements surrounding NINE's derivative strategy/products in the coming months. Valuation Delta 9 is currently trading at a 2020E EV/EBITDA multiple of 5.6x, versus our target multiple of 8.8x. We maintain our SPEC BUY rating given the company's discounted valuation, expected execution, and potential catalysts surrounding licensing, wholesale and retail ramp-ups and partnership initiatives.