Sundial Growers Inc: The Time Could Finally Be Right

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Sundial Growers Inc. (NASDAQ:SNDL), one of the Canadian marijuana stocks, recently went public on the NASDAQ and raised gross proceeds of C$170M

SmallCapPower | August 30, 2019: Sundial Growers Inc. (NASDAQ:SNDL), one of the Canadian cannabis stocks, is a $740M market cap Canada-based cannabis cultivator that recently went public on August 1, 2019, on the NASDAQ. On August 14, 2019, SNDL reported Q2/19 financial results, highlighted by revenue of $19.2M and EBITDA of -$0.5M.

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Company Description

Sundial Growers is a Canadian cannabis cultivator that aims to target the Canadian cannabis market through three distinct brands: Heal, Help, and Play. 1) The Heal brand is the Company’s medical cannabis line to be used as prescription medicine. 2) The Help brand is the Company’s line on CBD products. 3) Play is the Company’s adult-use line intended to enhance social, spiritual, and recreational occasions. Sundial has cultivation in Alberta, British Columbia, and the United Kingdom.

Investment Thesis

Focus on premium cannabis expected to generate higher margins. Sundial Growers plans to take a craft cannabis approach. With 126 cultivation rooms and an R&D facility, Sundial Growers should be able to set itself apart from other Canadian cultivators and generate robust margins.

Bridge Farms acquisition to make Sundial a key player in the European CBD Market. The large facility size and expansion, in addition to Bridge Farms scale and automation, should make the Company a significant player in the European CBD market.

Strong management team with a track record of execution as well as a tight capital structure. CEO Torsten Kuenzlen has 25+ years of growing CPG brands at Coca-Cola and Molson Coors in international markets. In addition, Sundial has 82.8M shares outstanding with ~32.5% management and insider ownership.

Operations Overview

Figure 1: Sundial Growers Operations

Source: Company Reports

Once fully constructed, Sundial’s Olds Facility will be approximately 480,000 sq. ft with 126 cultivation rooms. Currently, Sundial Growers has 242,000 sq. ft, comprising of 12 cloning and vegetation rooms, and 74 revenue- generating flowering rooms. The modular facilities are expected to bring premium yields, as well as quality and consistency of product. The build-out of the facility is expected to cost $200M, with $55M to $60M that still needs to be invested. The Rocky View Facility is the Company’s research hub that comprises of 31,000 sq. ft with nine cultivation rooms (three of which are used for flowering and six for research and development). The full build-out of the Rocky View facility will cost approximately $8M. The Merritt Facility, once constructed and licensed, is expected to serve as the primary production facility for the BC Weed Co brand. The full build-out is expected to cost $22M, of which $18M still needs to be invested. Bridge Farm currently compromises three facilities (Homestead, Horseshoe, and Clay Lake) and is expected to build out to ~3.6M sq. ft by 2021. Bridge Farm currently cultivates hemp from 40,000 sq. ft and this is expected to increase as Sundial receives regulatory approval and begins to convert Bridge Farms operations to growing hemp. The additional build-out of the 2.0M sq. ft is expected to cost an additional $35.0M.

Business Overview

Heal Segment

Under the Heal segment, Sundial Growers has a joint venture (JV) with Pathway Rx. The Company uses advanced technologies, including machine learning and artificial intelligence, to screen through a vast library of cannabis strains, to identify and customize treatments for a wide variety of medical conditions. The JV gives Sundial exclusive rights to Pathway RX’s intellectual property for royalty payments. Sundial believes that there is a significant global opportunity in medical cannabis. As of June 30, 2019, there are 41 countries that have legalized medical cannabis. SNDL also plans to launch a digital medical platform to sell directly to patients and has partnerships with two universities to identify and develop cannabis strains for medical purposes.

Help Segment

With the Help segment, Sundial Growers plans to capitalize on the growing worldwide CBD opportunity, thanks to the acquisition of Bridge Farms. Bridge Farms is an existing producer in the U.K. that is currently cultivating basil, coriander, mint, dill, tulips, roses, and poinsettias. Bridge Farms currently has ~1.6M sq. ft in production and is constructing an additional ~2.0M sq. ft, which should be coming online by 2021E. The new construction will bring scale, automation, and a hemp cultivation license. Additionally, Bridge Farms has existing relationships with Tesco, Wal-Mart, and Amazon, which Sundial can leverage to distribute its products. Sundial paid $45M in cash and a $45M convertible debenture, which converts to 2.3M Sundial shares.

Figure 2: Play Product

Source: Company Reports

Play Segment

The Company’s Play segment is focused on the adult-use market in Canada. Sundial offers recreational cannabis products, which are safe, consistent, and functionally tailored to enhance certain specific desired experiences. SNDL believes that premium inhalable cannabis products are expected to command ~30% portion of the Canadian recreational market. As such, the Company is focused on developing premium brands, such as its Top Leaf and BC Weed brands. Sundial Growers plans to feature its adult-use products in cannabis journals and other direct-to-consumer marketing to gain market share. Sundial Growers currently has supply agreements in place in five Canadian provinces (Alberta, British Columbia, Saskatchewan, and Manitoba).

Financial Analysis

On August 14, 2019, Sundial Growers reported Q2/19 financial results, highlighted by revenue of $19.2M and EBITDA of -$0.5M. This is an 11.9x increase quarter-over-quarter from $1.5M in revenue reported in Q1/19. The Company harvested a total of 9,551 kg of cannabis in Q2 and sold 4,741 kg of product, which was an increase over Q1, when 1,896 kg was harvested, and 323 kg was sold. Average selling price was $4.07/gram (was $6.52 in Q1) and average cost was $2.20/gram, a decrease from $2.41/gram in the prior quarter. The decrease was attributed primarily to efficiency gains and economies of scale realized as production capacity increased. Sundial has $38M of cash and equivalents, along with ~105M of restricted cash, which will be used for the build-out of facilities in Alberta, British Columbia, and the United Kingdom. The Company has no goodwill and ~$18M in intangible assets and, as a result, there is little risk of goodwill/intangible write downs in the future. Additionally, the Company has a $175M credit facility, which it is expected to leverage to build-out its facilities, in particular the Bridge Farm facility, and consumer brands platforms.

Management Team

Sundial’s CEO Torsten Kuenzlen has 20+ years of experience at Coca-Cola and five years of experience at Molson Coors. Mr. Kuenzlen brings knowledge in consumer-packaged goods (CPG) and international expansion. Additionally, Sundial Growers cap table has 82.8M basic shares outstanding with ~32.5% of the shares owned by management and insiders.

Sundial Growers stock closed Thursday’s trading session down 10% at US$7.86. Sundial trades at a market capitalization of US$740M.

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