Canaccord Research Note - Q1 Financials
Delta 9 Cannabis, Inc Canadian Cannabis | Flash Update Q1 results: solid wholesale performance NINE-TSXV | Price (30-May) C$1.41 | Market Cap C$87.0M SPECULATIVE BUY PRICE TARGET C$2.20 With the pre-release of revenues in the $5.4-5.8M range, Delta 9's Q1 results were largely within expectations. Highlights included solid wholesale numbers but a relatively low cash position due to changes in working capital. Details are as follows: Revenues. Net revenues of $5.6M were just below our $5.75M estimate and 5% over Q4 revenues of $5.3 M. While revenue guidance had been pre-released, there were positive variances in NINE's Q1 revenue mix versus our estimates; higher-margin wholesale revenues of $3M were well above our $2M estimate, while retail sales softened but continued to be industry leading, in our view. Volumes/pricing. For the first time, the company offered details on volumes and per-gram metrics. In total, Delta 9 produced ~420 kg of flower at a solid cost of $1.60 with an average sales price of $7.60/gram. Pricing was well above our $5.90/gram estimate (which factored in lower-priced Auxly sales) while COGS beat our $3.25/gram estimate. Gross margins. Gross margins of $1.8M / 32% were roughly in line with our $1.9M / 34% estimates. We expect that the wholesale segment outperformed our estimates and note that margins improved over Q4 (at $1.3M / 25%). SG&A. At $2.9M, SG&A expenses were slightly higher than Q4. Gain on Delta West sale. The company recorded an unrealized gain on its Delta West disposition in the amount of $12.1M following its $14.95M disposition. We would expect an unrealized loss in Other Comprehensive Income in Q2/19 based on the current value of the underlying equities. Balance sheet. The company ended the quarter with $7.7M in cash, down significantly from $21.3M in Q4/18. The decline was due to a $5.2M hit to working capital and $4.7M in capital spending. We estimate a total of $7.2M is available in undrawn debt facilities and note that total working capital of $18.8M was down modestly from Q4 at $20.6M. Operational updates The company reiterated recent press releases outlining provincial distribution agreements, retail openings and HC approvals. The company indicated it will use working capital, operating cash flows and debt and equity (if necessary) to fund its ongoing expansion to 16,000 kg. We are expecting additional updates from the company's conference call today at 9:00 am ET (1.888.866.7786). Valuation We value Delta 9 using a SOTP DCF model, where we apply a WACC of ~13% and 2.0% terminal growth rate to arrive at a per-share value of $2.17. Based on our estimates, Delta 9 is 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 attractive valuation and catalysts surrounding licensing, EU-GMP certification, and ongoing wholesale and retail ramp ups. 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.