It’s been a volatile year for Sundial Growers (NASDAQ:SNDL) stock. At the beginning of the year, SNDL stock was trading at 47 cents per share. With aggressive growth plans and hopes for Federal level legalization of cannabis, investors pushed SNDL stock to $3.96.
It didn’t take time for the rally to fizzle out and after sustained correction, the shares currently trade at 70 cents a piece. It seems very likely that SNDL stock has bottomed out and current levels are attractive for fresh exposure.
My view is underscored by the fact that Sundial’s losses widened in the first quarter of 2021 with the pandemic snuffing sales. However, SNDL stock remained sideways after the results were released.
Let’s talk about the reasons for the big correction. First and foremost, profit-booking was likely after a sharp rally, which was partially speculative in nature. Furthermore, Sundial has been on a capital-raising spree to pay for its expansion plans. Equity dilution is another major reason for the big correction.
Positive Triggers for SNDL Stock
Now, about that capital raising spree. As of Q1 2021, Sundial reported cash and equivalents of $873.5 million. This cash buffer gives the company a lot of financial flexibility to pursue growth opportunities. Considering the current cash buffer, it seems unlikely that Sundial do anything to further dilute equity.
On the organic growth front, Sundial reported revenue of $9.9 million for Q1 2021, which was lower by 29% as compared to Q4 2020. Growth was tempered by Covid-19. However, the company did manage to report its first positive EBITDA. If it can sustain the positive adjusted EBITDA, it’s a key upside trigger for SNDL stock.
I also like the fact that branded cannabis sales were 74% of total sales. If sale of branded products remains robust, the company is positioned to deliver healthy EBITDA margin and cash flows.
Beyond Q1 2021, I believe that the following factors are likely to ensure that the company’s growth is healthy in the coming quarters.
In May 2021, the company announced the acquisition of Inner Spirit Holdings for a consideration of $131 million. The company is a franchiser and operator of retail cannabis stores in Canada.
With 86 stores, the company has a significant footprint. It’s very likely that Sundial will leverage on the retail presence to sell the company’s branded inhalable products. It’s also important to note that for Q4 2020, Inner Spirit reported revenue of $9.2 million and an EBITDA margin of 19%. The acquisition is therefore likely to boost top-line growth coupled with margin expansion.
Opportunities in the SunStream Bancorp JV
Sundial has also a formed a 50-50 joint venture with SAF Group. The latter is a Canada-based alternative investment manager.
Sundial had initially committed $100 million to the SunStream Bancorp JV. However, the commitment was recently raised to $188 million.
The idea is to create a co-managed special opportunities global cannabis fund. The fund will create a portfolio of debt, equity and hybrid investments. I believe that the JV is likely to create long-term value.
It’s worth noting that in Q1 2021, the company generated revenue of $15.7 million from cannabis-related portfolio investments.
Once the JV has debt and equity investments, it’s likely to serve as a source of recurring revenue for the company. Sundial believes that there is a global pipeline of $500 million related to debt and equity opportunities. I would not be surprised if Sundial further increases the commitment to the JV.
Concluding Views
Sundial Growers is aggressively creating a broad portfolio of investments. Earlier this month, the company acquired additional stake in The Valens Company (OTCMKTS:VLNCF), which is a developer and manufacturer of cannabinoid-based products. As the legal cannabis market continues to grow, these investments will deliver results.
As the company continues to deploy its cash in growth and investing activities, revenue and EBITDA are likely to accelerate. Therefore, SNDL stock looks attractive after a big correction.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.