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.

Why Should Investors make an exit?

• Lower margin profile v/s Industry: In Q3 2021, the company failed on maintaining its pace and witnessed lower performance under operating margin matrix, consisting of gross margin, EBITDA margin, operating margin and net margin, which exhibits the pressure on company.

Source: REFINITIV, Analysis by Kalkine Group

• Weak liquidity profile: In Q3 FY21, the company's current ratio was 1.06x compared to the industry median of 2.85x, while the quick ratio stood at 0.31x compared to the industry median of 1.56x. These lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.

• Long cash cycle days: The company’s Cash Cycle (Days) has increased compared to the previous sequential quarters, implying the company is taking more days to convert its inventory to cash. In Q3 2021, its Cash Cycle stood at 199.0 days against 161.6 days in Q2 2021. Also compared to industry median its very high, which is at 138.5 days only.

• Over leveraged against an industry: The company’s debt to equity ratio at the end of September 30, 2021, stood at 1.33x, which is too high against the industry median of 0.48x, implying higher balance sheet risk.

• Exhausted technical indicators: The stock is continuously making lower highs and lower lows on daily chart, which is considered as a bearish pattern. Furthermore, the stock recently closed below its sloping trend line, indicating that it may further test its resistance, which means the stock could witness price consolidation or correction from there.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales Based

Analysis by Kalkine Group

Stock recommendation

The company recently released its Q3 2021 financial results, which showed strong top-line growth and an adjusted EBITDA, however, it failed on maintaining its pace and witnessed lower performance under operating margin matrix, which exhibits the pressure on company. Additionally, its liquidity ratios are lower than the industry median, as well as its cash cycle days are higher, indicating a negative liquidity profile. Even the greater debt profile implies that the balance sheet is under stress. Moreover, the technical indicators implies that the stock is in a bearish trend and the price may correct or consolidate further. Therefore, based on the above rationales and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 0.315 on January 13, 2022.

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.