Sundial Growers or Indiva: Which is the Better Buy?

At the beginning of May, I said that Sundial Growers (NASDAQ:SNDL) wasn’t the best cannabis stock to buy based in Alberta. Rather than buy SNDL stock, I suggested investors consider High Tide (OTCMKTS:HITID) instead. 

marijuana stocks Hand gently holding rich soil for his marijuana plants
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Alas, a piece of news I overlooked when writing my May commentary could change my perception of Sundial.

How so, you ask?

I neglected to consider the company’s February investment and loan arrangement with London, Ontario-based Indiva Ltd. (OTCMKTS:NDVAF). Sundial bought 25 million Indiva shares at 44 cents CAD for an 11 million CAD investment in that deal. At the same time, it lent Indiva 11 million CAD at 9% interest. The loan matures on Feb. 23, 2024. 

For Sundial, it gets 18.45% of Indiva and almost 1 million CAD in annual interest payments. For Indiva, it gets expansion capital to grow its strong line of edibles, pre-rolls, flower and capsules. It’s a win/win.

This, along with the May 5 news that Sundial would buy Inner Spirit Holdings (OTCMKTS:INSHF) for 131 million CAD ($108.5 million) in cash and stock, has me wondering if Sundial isn’t a good buy after all.

While I am sold on Indiva’s edibles, I could have my cake and eat it too by buying Sundial stock, which would give me an indirect piece of Indiva.

Should investors buy Sundial or Indiva? I’ll consider both sides of the argument. 

SNDL Stock and Retail Expansion

Sundial paid 30 cents CAD in cash and issued 0.0835 of its shares for every Inner Spirit share. That’s the equivalent of 39 cents CAD, a 63% premium to the closing price the day before its announcement in May. 

Inner Spirit operates 86 cannabis stores across Canada under the Spiritleaf brand. It plans to open more than 30 stores in 2021. By the end of the year, it will have stores in six Canadian provinces, including Alberta, British Columbia, Saskatchewan, Manitoba, Ontario, and Newfoundland and Labrador. 

Where I live in Nova Scotia, cannabis retail is controlled exclusively by the provincial government. Whereas, in Newfoundland, the government has gone with a hybrid system where Newfoundland and Labrador Liquor Corp. (NLC), a provincial crown corporation, controls the supply and distribution of cannabis in the province. It also regulates the private companies who obtained licenses to retail cannabis in the province. 

The NLC recently revealed some of the private retailers newly approved to sell cannabis. It plans to increase the number of stores in certain communities where demand justifies further expansion. Spiritleaf currently has three stores in Newfoundland. 

Spiritleaf’s Growth in Sales

Interestingly, Spiritleaf has developed a franchise, asset-light business model that will expand much more quickly and with lower capital investment requirements. Its stores sell many of Canada’s best cannabis brands. 

In 2020, Spiritleaf had annual system-wide retail sales of 105.3 million CAD, up from 29.4 million CAD a year earlier. After subtracting sales from its franchise stores, it generated 26.8 million CAD in 2020, up from 7.8 million CAD in 2019.

It ended 2020 with 13 corporate stores and 55 franchise stores. By the end of March, it had 18 corporate stores open and eight pending, with 63 franchise stores open and another 27 pending, for 116. 

Based on system-wide sales, the average store generated 1.55 million CAD in 2020 (105.3 million CAD divided by 68 stores). It’s probably higher because I’m using the number at the end of the year. If I take the numbers at the beginning and end of 2020, I get 1.91 million CAD per store.

As for Spiritleaf’s member benefits program, it gained 230,000 members from December 2019 through March 2021. That, too, is impressive. 

Based on 2020 adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of 3.4 million CAD ($2.8 million), Sundial is paying 39x adjusted EBITDA for Inner Spirit. 

By the end of 2021, I wouldn’t be surprised if that multiple was cut in half as Spiritleaf generates more revenue and greater non-GAAP profitability. 

What About Indiva?

Between its Bhang chocolate and Wana gummies edibles – it has the Canadian manufacturing and distribution rights – Indiva has 46% of the edibles market in Canada. That’s got to be worth something.

Sundial paid 44 cents CAD per share for its 18.45% interest in Indiva, so it’s currently breaking even. Based on its February investment, Indiva was valued at 60 million CAD ($49.7 million). Indiva had adjusted EBITDA in 2020 of -4.5 million CAD ($2.8 million). It’s got a ways to go before it’s making money.  

Both Indiva and Sundial have their pros and cons. 

I’m not sure Sundial paying almost 40x adjusted EBITDA was a good move. Sure, it’s now the largest private cannabis retailer in Canada, but with several provinces opting out of private ownership, its expansion possibilities will begin to dwindle at some point. 

As for Indiva, getting the Canadian rights to Wana was brilliant. However, Canada has a relatively small domestic adult-use cannabis market. The owners of Wana in the U.S. have a much bigger opportunity. Canada was probably an afterthought for them.

More Intrigued About SNDL Stock

While I’m more intrigued about Sundial than I was a month ago, I will have to study its business a little more before becoming a convert. As for Indiva, I love its branding. I think that will take it far in the Canadian market. 

At this point, if I were making a speculative bet, despite losing money, I’d choose Indiva. If that changes, you’ll be the first to know.  

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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