Sunniva Q1 Earnings: What to Expect?

 sunniva earnings call
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Sunniva Q1 Earnings 2018

Sunniva Inc (OTCMKTS:SNNVF, CNSX:SNN) is not a household name by any stretch of the imagination. It is not even a semi-popular name. And yet I’ve been waiting for Sunniva Q1 earnings with bated breath—I even marked it on my calendar, something I don’t do for just any Q1 earnings date.

So, what makes Sunniva so special?

Before I let you in on that secret, you should probably know a few things about Sunniva’s upcoming earnings announcement.

Firstly, the earnings report will be released on Wednesday, May 30, 2018.

Also, I expect a strong dose of revenue growth, given that Sunniva continued to scale up its production during the quarter. The profit picture, however, won’t be so rosy.

Each of the firm’s subsidiaries was cash negative last quarter, and nothing material has changed since, meaning that we’re unlikely to see improvements on the bottom line.

Even if that weren’t the case, Sunniva is growing revenue by acquiring smaller companies. It lays out significant amounts of cash to complete those deals, meaning that, in the short term, it’s “robbing Peter to pay Paul.”

Despite these formidable tailwinds, I’m still bullish on the SNN stock price.

Chart courtesy of StockCharts.com

It is trading at a steep discount at the moment. Investors have—I think unfairly—pummeled the share price since January. This could turn at the upcoming earnings release, however, because Sunniva has several achievements to talk up, including:

1) A New Clinic in Windsor, Ontario

Sunniva’s Canada division is held together by one important subsidiary: Natural Health Services Ltd (NHS). It consists of seven medical marijuana clinics across the country, serving a total of 95,000 active patients. On May 30, it will introduce a brand new location in the southern tip of Canada. (Source: “Media Advisory – Sunniva Inc. Subsidiary Natural Health Services Announces Grand Opening of Medical Cannabis Clinic in Windsor, Ontario,” Cision, May 23, 2018.)

2) A Supply Agreement with Canopy Growth

Some people may have forgotten that Canopy Growth Corporation (OTCMKTS:TWMJF, TSE:WEED) contracted Sunniva for 90,000 kilograms of dried cannabis over a two-year span. The Sunniva Q1 earnings report will be a good time to remind them. (Source: “Canopy Growth Signs Significant Supply and Sales Agreement with Sunniva Medical Inc,” CIsion, February 21, 2018.)

3) A New 126-Acre Facility in Okanagan Falls

This $7.0-million purchase in Okanagan Falls, British Columbia is central to Sunniva’s agreement with Canopy Growth, so I expect the company to emphasize its progress in the report. (Source: “Sunniva Inc. selects Okanagan Falls site for Canadian facility,” Sunniva Inc, May 3, 2018.)

Of course, there were reasons that the SNN stock price was trading so low.

Chief among them was that Sunniva delayed the release of its fourth-quarter earnings report. You know the share price will take a hit when you do that. That’s true at any point in the life cycle of a public company, but it’s a near-fatal wound if you’ve just secured listings on two stock exchanges, which Sunniva recently had.

One Reason to Be Bullish

But don’t despair. There’s hope for Sunniva stock, and it lies in the over-crowding, oversaturation of Canadian marijuana stocks.

Everywhere you look, there’s a new weed company issuing shares and running the “hype machine” at full capacity.

Competition has grown so intense that firms are teaming up—mergers are happening constantly, and with higher and higher price tags.

Companies like Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB) and Aphria Inc (OTCMKTS:APHQF, TSE:APH) are spending billions on marijuana acquisitions, eager to secure a front-runner position ahead of Canada’s July 1 legalization date.

That’s where Sunniva comes into play.

It is an ideal takeover target. Not only is it trading for next to nothing, but it comes attached with a California division.

It serves as a backdoor into America’s biggest weed market. How so? Well, it has eight 10,000-square-foot cultivation licenses, two manufacturing licenses, one 22,000-square-foot cultivation license, one 22,000-square-foot nursery license, and one 10,000-square-foot nursery license. All of them granted by the state of California.

This suite of licenses would look tempting to a domestic producer like—ahem—Canopy Growth Corporation.

It could benefit CGC stock enormously. By absorbing Sunniva, Canopy would gain exposure to a completely different market, thereby hedging against regulatory concerns at home.

If I’m being entirely honest, this takeover possibility is why I marked the Sunniva Q1 earnings date on my calendar. I want to see if the company is dressing itself up for potential suitors.

One Reason to Be Bearish

That said, we should address the elephant in the room. Not all is going well in the Canadian marijuana industry—producers are worried about a supply overhang.

You see, by legalizing cannabis on July 1, 2018, the federal government (Canada’s, not America’s) is in effect raising demand for cannabis companies.

Everyone knows that.

I know it. Investors know it. Cannabis experts sure as heck know it. In fact, we’re all so hyper-aware about it that we may have accidentally engineered a supply glut.

Just look at the numbers:

  • Low: Deloitte estimates 600,000 kilograms of demand per year.
  • Medium: The Canadian Parliamentary Budget Office (PBO) is slightly more optimistic at 650,000 kilograms.
  • High: Industry advocates are at the high end: 900,000 kilograms.

All below one million kilograms…

And yet Canadian weed firms are projected to deliver 1.5 million kilograms per year! That’s more than double median demand forecasts!

This is the opposite of what a reasonable analyst would have expected given the (impending) increase in legal weed consumption.

Analyst Take

While the possibility of a marijuana supply glut is real, I believe its effects would only be temporary. My view is that SNNVF stock price has significant upside.

However, I feel compelled to remind investors that this is a risk-capital stock, and anyone unprepared for belly-aching volatility should steer clear.