Decibel Cannabis Co. (DBCCF), a prominent Canadian cannabis brand known for its dominance in the pre-roll market, is currently trading at attractive multiples of 0.8x CY24 sales and 4.2x adjusted EBITDA. Senior analyst Pablo Zuanic believes this valuation presents a compelling investment opportunity, particularly given the company’s significant position in the infused pre-rolls and vape product segments, where it ranks as Canada’s fourth-largest player.
Despite its strong position, Decibel has faced challenges in recent quarters. The company reported a 19% year-over-year drop in domestic recreational sales during the second quarter of 2024, totaling $22.1 million. This decline marks the second consecutive quarter of year-over-year sales decreases, primarily due to a loss of market share in the infused pre-roll and vape segments. Adjusted EBITDA margins have also fallen to 18%, down from a peak of 27% in early 2023, due to reduced gross margins and increased selling, general, and administrative expenses.
However, CEO Benjamin Sze and his team are implementing strategic adjustments to address these challenges. The company is prioritizing the defense of its market share in infused pre-rolls and vapes, while also planning to increase flower production for its core segments. Management is focused on achieving operational efficiencies, aiming for a free cash flow run rate of $10 million per annum and a reduction in debt by approximately $6 million over the next two years.
Despite its recent challenges, Decibel’s market share in infused pre-rolls remains significant, having decreased from 75% in early 2022 to 41% in mid-2024. The infused pre-roll category itself has seen substantial growth, accounting for 29% of total pre-roll category sales as of early 2024. In the vaping segment, Decibel has struggled to keep pace with industry shifts towards larger format sizes, contributing to its declining market share.
Despite a recent recovery in its stock price following the announcement of second-quarter results and strategic initiatives, Decibel’s stock is still down 47% over the last twelve months, underperforming broader market indices. Zuanic believes this valuation presents an attractive entry point for investors considering the company’s strategic adjustments and potential for market repositioning. The company’s focus on stabilizing its core franchises, expanding into domestic recreational flower markets, and increasing exports presents a promising outlook for future growth. With a strong management team focused on operational efficiencies and a compelling valuation, Decibel Cannabis Co. (DBCCF) is a company worth watching closely.
