GURU Organic Energy Corp

GURU Organic Energy Corp (TSX: GURU) is a wellness company, engaged in the business of manufacturing and marketing organic energy drinks. Geographically, it derives most of the revenue from Canada and has a presence in the United States. 

Key highlights 

• Signed national distribution agreement: Recently, PepsiCo Beverages Canada has inked a distribution agreement with the company to become its sole national distributor of plant-based energy drinks beginning October 4, 2021. We believe that GURU's Canadian development ambitions would be considerably accelerated by this long-term arrangement, since the firm would benefit from PepsiCo Beverages Canada's extensive direct-to-store distribution network across the country.

• Online sales platform continues to perform well: Consumer behavior has changed during the pandemic and shifted towards online sales; hence, the company has expanded its online consumer base over the previous few quarters, thus the company's online sales have consistently performed strongly in both Canada and the United States.

• Improving retail presence: The company has increased its retail footprint by 6,100 points of sale to over 21,000 since the beginning of the fiscal year. It just revealed an additional 800 doors at The Fresh Market, Weis Markets, and Raleys in the United States, as well as in Canadian Tire Gas+ in Canada, in addition to the 5,300 doors disclosed in Q1. With the addition of The Fresh Market, the company has now fully penetrated the U.S. natural channel, further strengthening its health and wellness positioning, which is a key positive.

• Launched new product in the U.S Market: GURU Yerba Mate, the company's latest product and the top-performing energy drink in Quebec's main market, was just released in the United States on June 1. We feel that expanding the organic product line would help the company's brand exposure and positioning in the United States. Furthermore, it would continue to capitalize on the strength of its brands and high demand for healthy options in the fast-growing energy drink industry throughout the summer as it implements its roll-out plans in Canada and the United States.

• Closed CAD 60.5 million deal offering: On 06 July 2021, GURU Organic Energy Corp has closed the public offering deal. As per this deal a syndicate of underwriters purchased an aggregate of 3,287,500 common shares of the Company at a price of CAD 16.00 per share. Out of which, 1,100,000 common shares were purchased by the company as Treasury Shares and 2,187,500 shares were purchased as secondary shares by management of the company for gross proceeds of CAD 52,600,000.
  

Financial overview of Q2 2021

Source: Company 

• The company announced its quarterly result, wherein its revenue increased by 74% to CAD 7.1 million compared to CAD 4.1 million in the previous corresponding period (pcp). The increase was due to sales growth in Canada and the U.S, as a result of increased points of sale in both markets.
• Gross profit totaled at CAD 4.4 million in Q2 2021, an increase of 82% compared to CAD 2.4 million in pcp. Gross margin also improved to 63% compared to 60% in pcp. The increase was due to a stronger product mix and the timing of promotional activities.
• The quarter was marked by a higher selling, general and administrative expense (CAD 5.5 million v/s CAD 3.2 million in pcp). It also witnessed higher financial expenses and reverse acquisition expenses in the reported period, due to which the loss before income tax increased to CAD 1.2 million against CAD 0.8 million in pcp.
• The group reported a net loss of CAD 1.2 million v/s CAD 0.6 million in pcp.
  

Risks associated with investment

The company is exposed to a variety of risks ranging from change in consumer taste and preferences, arrival of substitutes, intense competition, price risk, increase in raw material prices, supply chain risk. Other risk include forex risk as company has presence in the USA. 

Stock recommendation 

The company delivered another record quarter, with a 74% increase in sales and gross margins of 63%. Online sales also continue to perform very well in both Canada and the U.S., driven by evolving consumer behaviors. Recently, the company inked a long-term distribution agreement with PepsiCo Beverages Canada, and we believe that the company would benefit from PepsiCo Beverages Canada's extensive direct-to-store distribution network across the country. Furthermore, the company has a strong financial position with access to more than CAD 24 million in cash and credit facilities, which seems to be sufficient to meet the working capital requirements. Therefore, considering the stellar performance, bright prospects and risk associated, we believe the growth is likely to continue in the coming quarters. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 16.00 on July 19, 2021 with a lower double digit (in percentage terms) upside potential.

Technical Analysis Summary

One-Year Technical Price Chart (as on July 19, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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