Indiva Limited $NDVAF hit my radar because of the bought deal with Sundial Growers $SNDL. The company boasts many excellent points about its progress in the cannabis industry. Truth is, some of the metrics the company print are excellent.
- Average ~45% market share in edibles in four major Western Canadian provinces;
- Guidance of a 2,000% increase in net revenues for the upcoming quarter.
Those two metrics alone, should that be all you looked at, would likely persuade a lot of individuals to hit the buy button on this cannabis stock. But, is Indiva really a good buy?
Indiva Limited Stock NDVAF
A quick look at the stock shows that Indiva Limited is following along with the rest of the cannabis industry and is moving upwards. There was significant buying after the election in November and then again in early January. This is when the “Blue Wave” gave control of both houses of Congress and the Presidency to the Democrats who are likely to legalize cannabis.
From the perspective of Indiva, I give that a solid Meh! The reason is two-fold and simple. First, it is going to take a while before the Dems pull through on this. Then, you have to add in the fact that all of the states that are legal for recreational cannabis are just that: Already legal for recreational cannabis.
So… how does this help out the cannabis industry? Granted, there will be some changes to the cannabis industry with Federal legalization. But, they will be subtle and take time. Until then, it is largely up to the states to decide what happens inside a state. So, all of this buying (Yes, I am aware of the recent Reddit Attack on cannabis stocks) in cannabis is premature and out of fundamentals.
Then, there is the second reason I give Indiva a big meh when it comes to their upswing in stock price from the Democratic victory: They are a Canadian edible cannabis company. Anyone want to help me out and show me how a small edible cannabis company will benefit from federal legalization in the United States?
Indiva Limited Revenues
Future guidance by management has Indiva Limited at ~$6.5M CAD next quarter. That is whopping! That is a 2,000% increase YoY, as stated by the company. They operate in the western Canadian provinces and their market share is largely half of all edibles out there. With that large of a market share, a consumer is buying Indiva’s edibles and really, no one else’s.
I am highly encouraged that Indiva is doing so well. And, they should be given that cannabis in Canada is booming. YoY growth rates for retail sales of Canadian cannabis are huge.
Indiva Limited Gross Margins
Ugh… these are some of the worst gross margins I have seen in the industry. Despite the fact that Indiva is selling their edibles at such a high clip they are earning very small margins on their sales.
Something that management did not do is guide on future margins. All management mentioned was that their future sales would be pushing about $6.5M. Fortunately, the bar is so low here that margins only have one way to move, and that is upwards. And, that may in fact be an opportunity: If Indiva continues to grow its market share while simultaneously they start improving gross margins, by extension they will print higher earnings numbers. This is the one thing to watch for. And, this is a potential opportunity.
Indiva Operating Efficiencies
The next metric I always look at is operating efficiencies. For those who are not certain about operating efficiencies, this is the number that shows total operating costs over total revenues. Operating efficiencies is a percentage. You are always looking for a number that is lower than gross margins. But, again, with regards to gross margins, the bar was so low that is a near-impossibility with Indiva Limited.
I am going through some 350 cannabis stocks to weed out the best stocks from the worst. Generally, a company that prints gross margins of ~60% I would consider a strong company. At 17.4%, Indiva Limited is not even a consideration. Then, operating efficiencies is the next thing to consider. A company that has operating efficiencies of ~35% would be a strong performer. Indiva Limited has these two metrics backward.
But, and I stress, with the future guidance management gave, these metrics are very likely to improve. I am looking for increased margins and decreased total operating costs on a percentage basis. This will significantly improve the financials.
And, it is highly likely that this metric will improve. If Indiva rented a very large facility to produce their products, given the smallish revenues previously printed, there was a lot of “space” that was underutilized. Because of that, the increased production will translate into lower operating costs on a percentage basis over total revenues. Read: This number has no other direction but downwards.
Indiva Limited Net Earnings
As you can imagine, Indiva Limited is losing money. With gross margins at some of the lowest levels, and with operating efficiencies as poor as they are, this would be an obvious conclusion.
Indiva needs to work on its margins. I can work out that higher sales levels coupled with higher production levels will push down operating efficiencies on a percentage basis. But, the only clear path towards profitability is higher margins.
Keep in mind that Indiva has the top-selling edibles in four separate provinces in western Canada. Operating costs will improve as sales increase. That is a given. But, if you have the highest-selling edible products you also have strong branding. This will go a long way towards eventually improving margins as the company will be able to raise its prices for its products.
Indiva Limited Cash On Hand
Although I always keep a keen eye toward this metric, the only time I bring up cash on hand is when it is a major concern.
This is a major concern.
Indiva Limited just got themselves a lifeline via a deal with Sundial. Sundial Growers $SNDL just bought into Indiva for about $11M. Then, they extended them a lending facility for an additional $11M. This eliminates any need for future funding for some time.
Indiva’s cash burn rate is likely to be about $3.5M – $5M per year given where they are right now. But, keep an eye on the increased revenues and how that will play out on net earnings. Likely, you will see lower levels for cash burn. Generally, I feel comfortable with where Indiva Limited is on its cash position.
In the meantime, I am going to do a very detailed analysis on Sundial here on “paper”. I did a video on Sundial as more of a precursor to what I will do next. I’m not a fan of Sundial; their numbers are out of line with normal business metrics. I will analyze Sundial in my very next posting.
Indiva is sitting on the necessary cash to sustain themselves. They are the best-selling edibles company out there. They are printing large revenue increases. The combination will push cost metrics lower. However, margins need to go up and that may take a few quarters before we begin to see those results.
In the meantime, I believe all cannabis stocks are going to move lower; they are generally all out of line with fundamentals. Indiva could be a strong buy candidate simply because of its dominance in the edibles market out west up in Canada.
Do you want to know who will likely be the “Strong Buyer”? Sundial. It is my expectation that they take over the Indiva at some point very soon.
If the $NDVAF falls as I expect, putting on a small position will eventually play out nicely. I will consider this stock for my model portfolio and likely keep tabs on them. But, I need to see far better margins before I pull that trigger.
Now, let’s take a deeper look at Sundial… and why I dislike this company so much.
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