On Monday, Canadian cannabis LP Sundial Growers Inc. (NASDAQ:SNDL) released its financials for the first quarter of the year and the company's shares soared.

At the close of Monday's trading session shares were selling at $0.46, up 21% from the previous market close. Currently, the company's shares are trading 1.6037% higher at $0.4435 per share.

Cantor Fitzgerald's Pablo Zuanic called it a "quite volatile stock," treading at an 8% discount to his new sum-of-the-parts (SOTP) approach to valuation for the stock.

The Analyst

Zuanic retained a Neutral rating on Sundial's stock while lowering the price target to $0.48 (CA$0.61) from $0.97.

The Thesis

The first quarter was marked by one of the largest M&A actions in the company's history. On March 31, Sundial closed the acquisition of Alcanna Inc. for $255 million. The new subsidiary had a revenue of CA$162.5 million ($126.4 million) in the same quarter.

Retail & Cultivation

Currently, the company controls 183 cannabis retail stores in Canada, including 80 Value Buds discount shops which are 63% owned by Sundial via a deal with Alcanna and 103 Spirit Leaf stores.

"It would be a mistake to dismiss SNDL as 'too small' in cannabis, given the management vision and cash balances," the analyst said.

Cash, marketable securities, long-term investments and no outstanding debt amounted to CA$1.0 billion ($778 million) at the end of the period, with CA$361 million ($280 million) of unrestricted cash on May 13, 2022.

Moreover, equity stakes in The Valens Company Inc. (TSX:VLNS) (NASDAQ:VLNS) – which is well-positioned in manufactured formats - as well as Canadian grower Village Farms Intl (NASDAQ:VFF) are only going to favor the company's scale-up strategy, Zuanic added.

In addition, Alcanna owns 170 retail liquor locations in Alberta.

"We believe that SNDL will seek to stabilize and optimize the business and improve free cash flow trends," Zuanic said, adding that he would not be "surprised if this unit is eventually divested taking a 2-year view."

Lending

Last year, Sundial announced a 50/50 joint venture through SunStream Bancorp, Inc. Since then, the joint venture has had a credit portfolio comprised of secured and hybrid debt of $380 million. In the first quarter, the company recognized $4.1 million as its profit share from the Sunstream Bancorp JV.

"We see the potential synergies that Sundial can create from retailing, cultivation, and lending in the cannabis space," Zuanic said. Sundial is an "LP that investors should keep an eye on – at least we give management kudos for its ambitions and vision."

Photo: Courtesy of Nicholas Cappello on Unsplash