Delta 9 Cannabis Inc (TSX: DN), is a Canada-based company engaged in Biotechnology & Medical Research. The principal activities of the Company are the production, storage and sale of medical marijuana.

Key highlights 

• Witnessed healthy growth in Revenue and Gross Profits: The company posted healthy Net revenue of CAD15.2 million in the third quarter of 2021, which increased 16%, from CAD 13.1 million in the same quarter last year. While gross profit increased by 55% to CAD 4.8 million, against CAD3.1 million for the same quarter last year. The rise in gross profit was mainly due to lower COGS as a % of revenue, which stood at 68.4% V/s 76.3% in pcp.

Source: Company Filing

• Increasing retail presence: The company opened four cannabis retail stores this quarter with two in Edmonton, Alberta, and two in Manitoba, (Winnipeg and Selkirk). The group has now 16 operating cannabis retail stores with eleven in Manitoba, four in Alberta and one in Saskatchewan. Delta 9 continues to make progress on its goal of having 20 stores open in the near term. We believe it will accomplish this through select strategic acquisition targets and a focus on retail store build-outs at convenient and high traffic shopping locations.

• Focusing on medical cannabis market: A tiny percentage of the company's revenue comes from selling medicinal cannabis products directly to individuals who have gotten a medical document from their doctor. The company's recent addition of oils and extract products to its product portfolio is expected to result in increased income streams and a greater value proposition for medical clients, according to management.

• Opportunity from recreational cannabis market: The domestic recreational cannabis market, according to management, represents a significant growth prospect for the company in the coming years. Wholesale revenues of recreational cannabis products are projected to account for a significant portion of the Company's overall income. Management has entered into a number of important supplier agreements in order to achieve growth in this sector.
  

Financial overview of Q3 2021 in CAD

Source: Company

• In Q3 2021, the company reported higher revenue at CAD 15.2 million compared to CAD 13.1 million in the previous corresponding period. The rise was due to solid performance in the Company’s Wholesale and Retail segments
• On an account of decrease in % cost of sales to revenue at 68.4% V/s 76.3% and after accounting for changes in the fair value of biological assets, the gross profit increased to CAD 6.4 million in Q3 2021, compared to CAD 0.4 million in pcp.
• In the reported period the company’s operating expenses increased to CAD 6.5 million against CAD 5.0 million in pcp, as a result the group posted loss from operations of CAD 0.05 million against a loss of CAD 4.5 million in pcp.
• Primarily due to above stated reasons along higher finance cost, the company posted lower net loss of CAD 0.8 million in Q3 2021 against a loss of CAD 5.1 million in pcp.
  

Risks associated with investmentSeveral risk factors could impact the Company’s ability to execute its key strategies successfully and materially affect future events and financial performance. To name some of these risks are reliance on licenses and authorization, disruption in the supply chain, inability to sustain pricing and inventory models, etc. Furthermore, maintaining compliance with industry regulations can make or break a cannabis business. 

Stock recommendation

The company recently released its Q3 2021 financial results, which showed strong top-line growth and an eighth consecutive quarter of positive Adjusted EBITDA. The company would continue to expand inside the retail shop chain and promote the company's price leader approach in order to increase client acquisition at new and existing locations. It also focuses on gaining traction in the cannabis wholesale business by expanding product lines and improving distribution across markets. Furthermore, the company's recent addition of oils and extract products to its product portfolio is expected to result in increased revenue streams, according to management. Furthermore, on the valuation front, the stock is available at a forward EV/ Sales multiple of 0.95x against an industry (Pharmaceuticals) median of 3.1x. Hence, considering the aforesaid rationales, we recommend a “Speculative Buy” rating in the stock at the closing price of CAD 0.32 on December 20, 2021, with double-digit (percentage term) upside potential. On top of all an investment in this stock is recommended to only those investors whose risk appetite is higher. 

Technical Analysis Summary

One-Year Technical Price Chart (as on December 20, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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