DionyMed Brands Inc (Sub Voting) DYMEF

Price target increased at Canaccord

[BenjaminGraham2]

SPECULATIVE BUY

PRICE TARGET C$6.00

We recently sat down with DYME CEO Edward Fields. We have growing conviction that DYME will meet or exceed our 2020 estimates. DYME’s revenue mix is seeing a strong shift toward captive brands, including Winberry Farms (vape), and Chill home delivery (direct-to-consumer - DTC). Both businesses offer higher than corporate average margins, and a differentiated path toward expansion into additional states. Initial moves into MA and NV will likely be through Winberry Farms, while new rules looming in CO offer substantial opportunities for DYME including DTC expansion. Importantly, DYME recently gained a product manufacturing recreational license in MA, and is building out production capacity. We are increasing our 2020 EBITDA estimate on richer mix assumptions and the addition of a modest contribution from MA. Our price target increases from C$5.50 to C$6.00.

Investment highlights

• Strategically positioned for brand expansion in CA: DYME’s wholesale distribution platform, Rise Logistics, and Winberry Farms brand are highly synergistic, driving outsized growth for the latter, and allowing Winberry to increase its share of Product Sales.
• Home delivery shifting to internal solution: While DYME provides fulfillment services for Eaze in CA, an increasing share of the company’s DTC business is being driven by Chill, DYME’s captive home delivery offering.
• Expansion into Massachusetts market: We are updating our model to reflect DYME’s previously announced MA production acquisition. We expect the deal to close immanently and are forecasting initial contributions to come later this year. The acquisition will allow DYME to wholesale its Winberry Farms Brand in the developing Massachusetts recreational market.
• Mix shift and MA contribution boosting our view: We are increasing our 2019 revenue and 2020 estimates. For 2019, revenue from $173M to $179M while EBITDA from $27.6M to $20.6M to reflect increased marketing spend for Chill and MA expansion; 2020 revenue and EBITDA to $280.4M and $56.1M from $262.5M and $52.5M; price target to C$6.00 from C$5.50, reflecting EV/EBITDA multiple of 6.9x our new 2020 estimate.

Strong uptake of Winberry Farms brand in CA.

Supplier consolidation in CA is propelling DYME’s Winberry Farms consumer products. We believe dispensaries are favoring wholesale distributors that can offer a stable source of high-quality compliant product, and DYME’s combination of Rise Logistics wholesale distribution infrastructure and Winberry consumer brand offering are positioning the company for meaningful gains. We note that DYME is currently serving more than 750 dispensaries in CA, and we expect this number to grow with the issuance of additional licenses later this year, especially in Southern CA. We also expect DYME to introduce new products in Q2, which should benefit revenues and mix for product sales in the 2H19. We are forecasting product sales of $41.2M in 2019 growing to $94.7M next year, while we are modelling EBITDA margins to increase from 22% to 31%.