Sundial Growers (NASDAQ:SNDL) now reportedly has 1.1 billion CAD in cash on its balance sheet, at least according to one analyst. My calculations show that SNDL stock is not worth anywhere near its present price.
The company said during its recent first quarter conference call that it has over 1 billion CAD in “loan assets” and cash and no debt. It said that 70% of that is in the form of unrestricted cash. Given that its cannabis business is losing money, this implies that SNDL stock is not worth much more than 60 cents USD or so. This is well below its price today ($1.05) as of June 11.
Calculating the Cash and Investments
Here is how I calculated this. First, I estimate that the loan assets are worth 98% of their underlying value, given some depreciation. That means that they are worth 300 million CAD x 0.98 x 0.8226 (exchange rate), or $242 million.
Second, the same calculation for the 700 million in cash (at 100% of its value) is worth $576 million. Therefore, its total fairly liquid assets are worth $818 million.
Third, there are 1.776 billion shares outstanding, as seen on page 14 of its latest earnings press release. As such, the cash and loans per share are worth 46 cents per share in U.S. dollars.
A recent article in Seeking Alpha basically analyzed the investments that Sundial Growers has been making in the cannabis arena. They are not impressed.
The largest investment appears to be a joint venture with a Canadian private equity firm called SAF. The Seeking Alpha article points out that whereas the deal is a 50/50 JV, only Sundial Growers is putting up cash (188 million CAD). Moreover, SAF has not published a track record in the cannabis investment arena. So we don’t really know how to value this JV.
So, by all rights, we should probably reduce the value of some of the cash investments that the company has made. But for now, we can keep them at 100% of the cost. However, as of March 31, there was only 33.5 million CAD in marketable securities. So, it appears that the SAF investment was made after March 31.
Valuing the Cannabis Business
Sundial Growers has a money-losing cannabis business. Its Q1 revenue was down 29.4% below last year, at 9.89 million CAD. However, it made a negative 3.4 million CAD gross profit, or a negative 34% gross margin. That is pathetic. It means the business is almost worthless.
Let’s give it some value for the actual assets in the warehouses and greenhouses. The balance sheet says there is 114 million CAD in property, plant, and equipment and 32 million CAD in inventory. To be generous, we will forget about all the bills, assuming receivables will cover them. That implies that the 100 cents on the dollar its assets are worth 146 million. But that is never the case. At 70 cents on the dollar, they are worth 102 million CAD, or $84 million USD.
Therefore, the total value in US dollars of its cash and hard assets is $818 million, plus $84 million, or $902 million. Therefore, with 1.776 billion shares outstanding, the net asset value (NAV) for SNDL stock is 50.8 cents per share.
What To Do With SNDL Stock
Just to be fair, let’s say somehow some company would be willing to pay $200 million for the Sundial Growers cannabis business. That brings the total NAV to $1.018 billion. That makes it worth 57.3 cents per share.
But this is still 45.4% below the present SNDL stock price of $1.05 per share. That is more than any kind of margin of safety. In other words, SNDL stock needs to drop quite a bit before a value investor or a defensive investor should buy it. In short, it is simply too high, too speculative, and too opaque an investment for most safety-conscious investors.
On the date of publication, Mark R. Hake did not hold a position in any security that is mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.