Sundial Growers (NASDAQ:SNDL) released its delayed Q4-2021 and PY2021 earnings reports Wednesday post-market. The company reported a positive EBITDA for the year (CA$32.1 million) and the quarter (CA$18.5 million). With the acquisition of Spiritleaf, reported revenue of CA$22.7 million has increased 64% YoY and the acquisition has nearly doubled Sundial’s revenue numbers. The company still maintains its status as a cannabis bank with CA$1.1 billion in cash, marketable securities, and long-term investments. It reports CA$558.3 million in unrestricted cash. The company anticipated a possible reverse stock split, if its share price does not stabilize at or above $1 per share by Q3-2022.
Although cannabis stocks have seen a few rallies in 2022, the sector has mostly been bearish for the year. Extreme volatility in the larger markets and the unforeseeable future of US cannabis legalization have kept the cannabis stocks on a downtrend. When volatility subsides, here and there, this sector begins to uptrend, as with the others. For now, I rate Sundial Growers as a Hold and recommend that investors continue to watch the company’s performance. It may be time to buy stock in the company because it trades at an impressive valuation and price, but the possible reverse split in the future produces an additional long-term risk.
2021 Full Year and Q4-2021 Financial Performance
The company reported 2021 full year net revenue of CA$56.1 million, representing a decrease of 8% from the previous year. Sundial decreased production to meet market conditions and this means less revenue overall compared to the previous year. The company reported Q4-2021 net revenue of CA$22.7 million, an increase of 63% YoY. The increase is due to the acquisition of Spiritleaf Holdings and the combination of the two company’s financials.
Cannabis cultivation revenue for Q4-2021 was CA$12.8 million, representing an increase of 56% from the last quarter. Cannabis retail revenue for Q4-2021 was CA$10.0 million, which segment was not present on the last quarterly report. Revenue from the Alcanna (OTC:OTCPK:LQSIF) acquisition is not yet present, although the deal was finalized on March 31, 2022.
Gross revenue from retail sales for Q4-2021 was CA$10.0 million including retail sales, franchise fees, royalties, and advertising fees. System-wide retail sales amounted to CA$74.9 million from July 30 to December 31, 2021, and CA$41.4 million for Q4-2021. These system-wide numbers reflect corporate-owned and franchise sales and do not reflect revenue reported by Sundial.
Gross margin for 2021 was a negative CA$7.0 million compared to negative CA$49.9 million in 2020, thus showing improvement. For Q4-2021, gross margin was a loss of CA$2.5 million compared to loss of CA$4.6 million in Q4-2020. Although margin remains negative, the cause of the improvement is due to the company producing less cannabis to meet market demands and having lower cost of sales.
Net loss from continued operations for 2021 was CA$230.2 million compared to CA$206.3 million in 2020. Net loss includes asset impairment on the Olds facility, loss on investments on securities, and change of fair value of derivative warrants. Q4-2021 net loss was CA$54.8 million compared to CA$64.1 million in Q4-2020.
Adjusted EBITDA from continuing operations for 2021 was CA$32.1 million compared to a negative $25.6 million in 2020. The positive number is partly due to the inclusion of interest and fee revenue as well as a decrease in the cost of sales. Q4-2021 adjusted EBITDA was CA$18.4 million compared to a negative CA$5.6 million YoY. The inclusion of revenue from Spiritleaf financial performance increased the number.
Sundial Growers used CA$577.9 million in capital for cannabis-related investments, with CA$395.6 million going to SunStream Bancorp. During Q4-2021, CA$89.1 million was used for these investments with CA$72.4 million going to SunStream. The investments generated $1.6 million in investment income for the 2021 year. Strategic investments in Village Farms International (VFF) and The Valens Company (VLNS) produced a loss of CA$64.7 million during 2021.
Revenue from investments during Q4-2021 was a loss of CA$18.8 million due to losses on marketable securities and CA$43.8 million due to price fluctuations of cannabis-related investments. The IPO of SunStream has been delayed. The company reports CA$1.1 billion in cash, marketable securities, and long-term investments, with CA$558.3 million of unrestricted cash and no outstanding debt.
Valuation of Sundial and Alcanna Acquisition
Sundial Growers is currently undervalued at 1.33x NTM Total Enterprise Value/Revenues. The next twelve months assume the acquisition of Alcanna and combination of financial performance. Market consensus on Q1-2022 revenue is CA$18.39 million and for Q2-2022 it is CA212.27 million. Alcanna’s last quarterly report (Q4-2021) showed CA$210 million in revenue and CA$44 million in profit. The company reported a net loss of CA$7.29 million.
When Sundial Growers and Alcanna combine financial statements, then Sundial Growers’ valuation will increase. This is the reason that the company’s current NTM Total Enterprise Value/Revenues is so low and the company is undervalued. It is not clear at the moment what Sundial’s valuation will be after the combination and to what extent its current stock price is trading below the company’s overall value. Sundial reported PY2021 book value of CA$1.8 billion representing $0.61 per share. Average market consensus target price for Sundial Growers is $1.00 per share.
Stock Price Performance: 1-year downtrend of 42.23%
Although the stock price is up 21.52% over the last 3-months, it has been down 19.47% over the last 6-months, 9.18% YTD, and 41.23% over the last 12-months. It is currently trading under its 20/50/200 moving day averages. On Balance Volume and Accumulation / Distribution have declined, as has trading momentum. Large institutional ownership is down to 7.75%. The stock price has seen some rallies and recently traded above $0.90 per share and neared $1.00 per share. The company says that if the share price does not stabilize over $1.00 per share by Q3-2022, then it will consider a reverse split.
Risk and Investment Strategy
Sundial Growers has low risk of liquidity and has more than enough cash to continue its operations into the future. The Alcanna acquisition will further improve Sundial’s financial performance and overall valuation. The Canadian cannabis market continues to shrink as more competitors drive down prices. Sundial has adjusted to this trend by slowing production and by taking an additional piece of the sector through retail sales.
There is a risk that Sundial’s stock price will continue its downtrend and that a reverse stock split may not be enough to produce a new uptrend. The larger cannabis sector is awaiting US legalization as the next synergy for cannabis stock price uptrend. It is unclear when the most recent legalization bill will be presented in the Senate or passed.
Investor sentiment may improve as Canadian LPs, like Sundial, show marked improvement in financial performance, for instance, showing free cash flow. Any new investment in Sundial Stock has a high risk of losing value over time, unless the current downtrend and volatility change. It is possible to buy the dip and reload on the stock at its impressive and undervalued stock price.
Sundial Growers has shown improved financial performance with the acquisition of Spiritleaf. Revenue from cannabis retail sales has supplanted the company’s cultivation and distribution revenues. With multiple segments, Sundial is able to take more of the shrinking Canadian cannabis markets. Sundial’s financials will improve further as it begins to report the acquisition of Alcanna. Sundial Growers holds a large cash position and makes investment revenue from loaning out cash to cannabis ventures, thus amounting to a cannabis bank of sorts. It is hoped that Sundial Growers’ stock price begins a new uptrend and that investor sentiment turns more bullish on the company. Until then, I rate the company as a Hold and recommend that investors watch the company’s future performance.