Growing like a weed

Delta 9 Cannabis has doubled the size of its retail chain by acquiring 17 Uncle Sam’s Cannabis stores in the Edmonton area.

The company announced that deal on Thursday along with a $10 million cash injection from Calgary-based Sundial Growers Inc. and its 2021 year end results featuring a 20 per cent increase in revenue to $62.3 million and its ninth consecutive profitable quarter.

The company paid about $14.3 million for the Uncle Sam’s stores (including the issuance of Delta 9 shares worth $1.8 million). John Arbuthnot, CEO of Delta 9 estimates that those stores should generate about $21 million to Delta 9’s revenue over a 12 month period.

The company is going to continue to operate the stores under the Uncle Sam’s brand for the time being.

"It was a matter of much discussion in our marketing department," Arbuthnot said regarding the branding of the new stores. "But we are curious if the customer demographics in these stores are wildly different than our current stores."

The company has made it clear for some time that it was intent on growing out a vertically integrated cannabis company where increasing its retail footprint has a substantial impact on its wholesale business.

Zach George, the CEO of Sundial, has a similar approach to the industry.

"In the mature cannabis markets in the U.S. the only profitable models that exist are actually vertically integrated," he said. "The parties that control everything from the seed to the point of sale to the consumer."

Delta 9 was the 13th cannabis producer licensed by Health Canada. But there are now about 700 and there are also hundreds of stores and so there is aggressive competition for shelf space.

Delta 9’s cannabis products make up about 25 per cent of sales at Delta 9-owned stores, which now total 34. The more stores it owns, the better chance it has to get more of its own product on store shelves.

In a report to his clients on Thursday, Venkata Velagapudi, an analyst with Research Capital Corp., said the deal was a good one for Delta 9 for a number of reasons, from the price paid for the stores, the importance of expansion outside Manitoba and the boost to the company’s wholesale business.

"Delta 9 may be able to increase its wholesale sales in the newly acquired stores gradually over the long-term," Velagapudi said. "This improves its growth outlook for the wholesale segment. We believe that this acquisition results in a higher revenue base for Delta 9, which is critical in improving its valuation multiples over the long-term."

While the company seems to continue to perform well, meeting its guidance benchmarks and making acquisitions, its stock continues to languish at 27 cents, near its 52-week low.

As a small cap cannabis company it has to fight to get noticed on Bay Street. Research Capital, for one, believes the shares should get to $1.00 in the next 12 months.

Arbuthnot is no longer too concerned about the share price. The entire industry has been in the capital markets dog house for more than a year with the main cannabis stock index down about 50 per cent over that time.

"We have slightly out-performed the index but that still means our stock is down about 50 per cent and that is nothing to hang our hat on," he said. "We focus on execution and as with numerous capital market tales before, you go out and execute and that unlocks value for shareholders."

Velagapudi said, "Based on our estimates after factoring the acquisition, we expect Delta 9 to achieve an annualized revenue base of $100 million by the end of 2022."

There is already plenty of consolidation going in the cannabis sector. Sundial ­— which benefited from being part of the meme stock craze and saw its share prices spike by more than 300 per cent a year ago ­— recently acquired about 200 stores with acquisitions of Spiritleaf and Nova Cannabis (the latter was included in its $346 million purchase of the large Alberta liquor store chain Alcanna, that just closed yesterday).

In discussing Delta 9’s strategy to increase its retail footprint, Arbuthnot referenced the successful consolidation of the collision repair business that Winnipeg-based Boyd Group has accomplished.

"Ultimately investors took notice of Boyd but it took years to get appreciated by Bay Street and Wall Street." Arbuthnot said. "Our thought is, why can’t Delta 9 act as the consolidator in the cannabis industry?"

The company also just finalized its new banking arrangement with Alberta-based connectFirst Credit Union, allowing it to pay off its long term debt with Canadian Western Bank as well as an $11.8 million convertible debenture that comes due in July.

The $10 million investment from Sundial is also in the form of a convertible debenture.

martin.cash@freepress.mb.ca