SNDL Inc’s Outlook Is Bullish on Raft of Acquisitions
There are sin stocks from the cannabis industry and there are sin stocks from the alcohol industry. Then there’s SNDL Inc (NASDAQ:SNDL), which is in both sectors. In fact, the company’s goal is to become the largest private-sector distributor of both liquor and marijuana in Canada—and it’s well on its way.
There’s a lot going on at SNDL Inc (formerly Sundial Growers Inc).
The company recently expanded its international operations by sending its first export of premium dried cannabis flower to Israel, one of the biggest medical marijuana markets.
It also recently announced it had entered an agreement to purchase all of the business assets of Superette, a cannabis retail company with dispensaries in Ontario.
In May, SNDL Inc completed its $320.0-million acquisition of Alcanna Inc., one of the largest private-sector alcohol retailers in North America (and the biggest in Canada) by number of stores. Alcanna’s majority-owned subsidiary, Nova Cannabis Inc. (TSE:NOVC, OTCMKTS:NVACF), owns or operates 78 marijuana stores in the provinces of Alberta, Ontario, and Saskatchewan.
In June, SNDL Inc entered a purchase agreement for the assets of Zenabis Global Inc., a Canadian medical and recreational marijuana company. Zenabis was acquired by HEXO Corp (NASDAQ:HEXO) in 2021 in an all-stock deal.
In August, SNDL Inc announced it was snapping up Valens Company Inc (NASDAQ:VLNS). This move gives SNDL a foothold in the lucrative U.S. cannabis market. The combined company is expected to be a marijuana industry leader in terms of financials.
Moreover, SNDL Inc reported wonderful second-quarter financial results and it continues to have one of the cannabis industry’s best balance sheets. As of August 11, it had $334.9 million of unrestricted cash and no debt. (Source: “SNDL Reports Second Quarter 2022 Financial and Operational Results,” SNDL Inc, August 12, 2022.)
Maybe this is why Wall Street is exceptionally bullish on SNDL stock.
Analysts have a 12-month share-price target between $5.52 and $8.00, which points to potential gains between 145% and 255%.
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SNDL Stock Overview
SNDL Inc is an enormous liquor and cannabis retailer, with 355 stores across Canada.
Its three liquor retail banners are “Wine and Beyond” (the biggest liquor store in western Canada), “Liquor Depot” (a convenience retail liquor outlet in Alberta), and “Ace Liquor Discounter” (a retail chain with more than 130 locations in Alberta). (Source: “Liquor Retail Banners,” SNDL Inc, last accessed October 21, 2022.)
SNDL’s marijuana cultivation operations grow small-batch cannabis using an individualized “room” approach, with 448,000 square feet of total available space.
The company’s current cannabis retail banners are “Spiritleaf” and “Value Buds.” (Source: “Cannabis Retail Brands,” SNDL Inc, last accessed October 21, 2022.)
Its cannabis product brands include “Grasslands,” Palmetto,” “Spiritleaf Selects,” “Sundial,” and “Top Leaf.” (Source: “Cannabis Brands,” SNDL Inc, last accessed October 21, 2022.)
SNDL Inc to Acquire Valens for $138 Million
On August 22, SNDL announced plans to acquire Valens Company.
Under the terms of the agreement, Valens’ shareholders will receive 0.3334 of a common share of SNDL stock for each share of Valens stock. (Source: “SNDL Announces Agreement to Acquire The Valens Company to Create Leading Vertically Integrated Cannabis Platform,” SNDL Inc, August 22, 2022.)
Based on the August 19 close of SNDL stock on the Nasdaq Capital Market exchange, this represents an implied value of $1.26 per share of Valens Company, for total consideration of approximately $138.0 million.
Through the acquisition, SNDL Inc increases its overall cannabis market share to 4.5% and its “2.0 product” market share to 5.2%, becoming a top 10 player in both categories.
The merger is expected to deliver more than $10.0 million of annual cost synergies and upwards of $15.0 million in additional adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) on an annual run-rate basis.
With 555,500 square feet of cultivation and manufacturing space and 185 cannabis stores, the combined company will offer a complete portfolio of branded products to consumers in Canada through its own supply and distribution channels.
Based on the estimated capitalization following the closing of the merger, SNDL Inc’s cultivation operations, combined with its cannabis retail and liquor retail segments, are valued at about $100.0 million. (Source: “SNDL Proposed Acquisition of The Valens Company,” SNDL Inc, last accessed October 21, 2022.)
With the merger, SNDL Inc will continue to have one of the best balance sheets in the North American regulated marijuana industry. The company will also have the highest pro forma Canadian cannabis revenue on a last-fiscal-quarter annualized basis.
With this acquisition, SNDL Inc will get immediate access to the U.S. market via Valens’ cannabidiol (CBD) company Green Roads, which it acquired in April 2021. In 2020, Valens Company entered the Australian market with a five-year distribution agreement with Cannvalate, Australia’s largest marijuana distributor.
Zach George, SNDL Inc’s CEO, said, “This powerful combination will result in the creation of a dominant vertically integrated company, exceptionally well-suited to weather the current cannabis environment and become a leader in the Canadian regulated products sector.” (Source: Ibid.)
Record-Second Quarter Revenue
For the second quarter ended June 30, SNDL announced that its revenue soared by 2,344% year-over-year to a record $223.7 million. (Source: SNDL Inc, August 12, 2022, op. cit.)
The big boost in revenue was juiced in part by the SNDL’s acquisition of Alcanna, which had liquor retail revenue of $148.6 million. And thanks to SNDL Inc’s acquisition of an interest in Nova Cannabis Inc. through the Alcanna deal, SNDL’s expanded retail network significantly increased, with its gross sales across the cannabis retail rising by 746% to $63.5 million.
SNDL reported a second-quarter net 2022 loss of $74.0 million, compared to a second-quarter 2021 net loss of $52.3 million. The increase was largely a result of investment losses and the company’s share of loss of equity-accounted investees.
SNDL Inc’s adjusted EBITDA loss in the second quarter was $25.9 million, compared to an EBITDA loss of $200,000 in the same period of last year.
The company’s expanded adjusted EBITDA loss was driven primarily by the SunStream Bancorp Inc. equity pickup of a $38.0-million loss. SunStream Bancorp is a joint venture between SNDL and the SAF Group that targets opportunities in the cannabis industry through a portfolio of debt, equity, and hybrid investments.
Analyst Take
SNDL Inc is an overlooked company that has been making many strategic acquisitions, positioning it to be the largest private-sector liquor and cannabis retailer in Canada. It also has a growing presence in the U.S. and Australia.
The company continues to transform and strengthen its business.
SNDL Inc has been making market-share gains through its retail network. Furthermore, in the second quarter, its cannabis operations generated positive adjusted EBITDA for the first time in its history. The company expects its recent acquisitions to have a positive impact on its financial results over the next two quarters.
That all bodes well for SNDL stockholders heading into 2023. SNDL remains an untapped opportunity for investors to gain exposure to the cannabis and alcohol sectors in North America in a way that doesn’t exist with any other publicly traded company.
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