We’ve all been wondering how Canadian marijuana producer Sundial Growers (NASDAQ:SNDL) would use its massive cash pile. Now, it seems the company is finally making some major moves with its 1.2 billion CAD. But while Sundial’s recent moves are interesting, it’s best to wait for its quarterly results in November before investing in SNDL stock.
Sundial Growers has had quite the year so far. Since cashing in on its meme-stock popularity in the early part of 2021, it generated a massive amount of funds to expand its business.
It made two noteworthy acquisitions in the second quarter after purchasing the Inner Spirit Holdings retail cannabis network. Sundial acquired Nova Cannabis and is moving into the alcohol business after buying out liquor store operator Alcanna.
These acquisitions could transform its business in the future, but Sundial still has a long way to go.
The Alcanna Acquisition
Alcanna is the largest retail liquor chain of the Great White North. It has more than 171 outlets across Canada, including retail locations in Ontario, Alberta and other provinces.
Moreover, Sundial’s recent acquisition, Nova Cannabis, operates more than 60 shops across Canada. The marijuana retail giant generates a healthy free cash flow of more than 13 million CAD.
One of the main reasons Sundial believes in the long-term value of the transaction relates to cash flows. In the past 12 months, Alcanna has generated a healthy FCF balance of 16.4 million CAD. Moreover, the liquor operator made a whopping 690 million CAD in revenues with a profit margin of 13%.
Long-term profitability, though, is questionable at this point. In the past five years, Alcanna’s operating margins were 3% or lower.
However, experts believe the acquisition could have an incredibly positive impact on Sundial’s bottom line. Through “synergies and other strategic initiatives,” the marijuana producer aims to add $15 million to its adjusted earnings.
Furthermore, Sundial projects a $914 million increase in revenues per year from its recent acquisitions. It will have retail interests across all Canadian provinces and different consumer segments. On top of that, Sundial will have access to both the cannabis and liquor markets with a larger footprint than it has currently.
SNDL Stock and Its Loan to Indiva
Cash flow troubles have plagued several marijuana producers over the years. Even though they generate strong sales, most of them are unprofitable and burn through cash quickly.
Sundial Growers is generating an additional income stream by loaning money to cannabis edible producer Indiva (OTCMKTS:NDVAF). In February, Sundial invested 22 million CAD in Indiva. Half of the funds are considered an equity investment, while the other half are a term loan carrying 9% interest.
On top of that, Sundial invested an additional 8.5 million CAD in Indiva recently. After an amendment to their deal, the interest rate was raised to 15%.
Another major change to the deal could seriously benefit Sundial in the long run. Previously, Indiva could pay just 50% of interest, while the other 50% could be paid in arrears. However, the option has been removed under the latest agreement.
The loan to Indiva is not going to have a significant impact on Sundial’s financials, though. The company had 760 million CAD in its cash till as of the latest quarter, and these interest payments aren’t going to flip the script for Sundial.
The company has made some major strides this year, which could pay dividends in the long term. But at this point, it’s best to take a wait-and-see approach with SNDL stock.
On the date of publication, Muslim Farooque 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.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.