Volatile Quarter, Strong Fundamentals Remain Intact

Report Highlights

• The company’s products are  available at 30k+ distribution points, including established retail/pharmacy chains such as Shoppers Drug Mart, Walmart (NYSE: WMT), and Kroger (NYSE: KR). DHB sells sleep aid products through its Dream Water brand, and pain relief products through its LivRelief and LivRelief Infused brands. In Q1-FY2025, 79% of sales came from the U.S., and the Middle East (Q1-FY2024: 80%), and 21% from Canada. 
• We believe FY2025 revenue will be driven by organic growth and recent product launches, including Dream Water Sleep Gummies and Dream Water Immunity Shots. Both products have received favorable reviews and strong ratings on Amazon (NASDAQ: AMZN): Dream Water Sleep Gummies are rated 4.2/5 based on 577 reviews, while Dream Water Immunity Shots have a 4.3/5 rating from 417 reviews. As a result of lower revenue, gross margins and EBITDA declined, and EPS turned negative. 
• In Q1, marketing expenses were up 10 pp YoY to 21% of revenue, which we believe reflects management's positive outlook for the upcoming quarters. The company ran several marketing campaigns last quarter, which should begin to pay off in Q2.
• DHB remains undervalued, trading at only 0.2x revenue, while comparables trade at an average of 1.4x. 
• Upcoming catalysts include new product launches, geographical expansion, and the potential launch of LivRelief in the U.S. 

Price Performance (1-year)

Background

DHB’s product portfolio consists of sleep aid/anxiety relief formulations, and pain relief products. The company is also trying to license its patent-pending proprietary transdermal delivery technology platform to pharma companies. 

Follows an asset-light model by outsourcing manufacturing and packaging to entities in North America. Two Primary Brands: Dream Water (sold in the U.S./Canada/the Middle East), and LivRelief (sold in Canada)

Available at 30k+ outlets in the U.S., and Canada, including major retailers and pharmacy chains. DHB’s annual revenue per store is approximately $350, which we believe is on the higher end of small health and wellness companies; larger brands generate $1k+

Financials (Year-End: June 30th) 

Historically, quarterly revenue has been volatile, as shown in the table below, due to the timing of orders from large customers. For example, Q1-FY2023 revenue was down 19% YoY, but the full year ended with 20% growth.

Q1-FY2025 revenue  was down 14% YoY, coming in 22% below our estimate. Management is confident they will be able to report YoY revenue growth for the full year

Gross margins were down 3 pp, missing our estimate by 2 pp, due to lower revenue. Marketing expenses were up 10 pp YoY to 21% of revenue, compared to the 10%-20% range for industry peers (Source: S&P Capital IQ)

SG&A expenses were up 3% YoY, primarily due to higher head count. Lower revenue significantly impacted EBITDA, and as a result, both EPS and free cash flow turned negative

Debt/Capital increased due to lower retained earnings. None of the outstanding options/warrants are in-the-money

FRC Projections and Valuation .

It is estimated that the global sleep aids market will grow from US$59B in 2023, to US$64B in 2024, and to US$89B by 2030, reflecting a CAGR of 6% (2023-2030)

It is estimated that the global pain management therapeutics market will grow from US$85B in 2024, to US$123B by 2034, reflecting a CAGR of 4%. Although Q1 came in lower than expected, given the recent product launches, their favorable reviews, and the volatility in the timing of orders from large customers, we are maintaining our full-year revenue forecast

We will adjust our estimates if Q2 turns out weaker as well. We are slightly lowering our FY2025 EPS estimate to account for higher marketing expenses

That said, we have raised our FY2026 revenue and EPS estimates, expecting higher marketing expenses to drive growth

Our DCF valuation remains unchanged at $0.10/share

The average sector forward EV/Revenue is down 1% since our previous report earlier this month. DHB is trading at an 87% discount (previously 90%) relative to its comparables

Using the average sector EV/Revenue, we arrived at a comparables valuation of $0.07/share (previously $0.08/share)

We are reiterating our BUY rating, while maintaining our fair value estimate at $0.09/share (the average of our DCF and comparables valuations). The company experienced a temporary revenue dip in Q1 due to unusual timing of large orders. However, we believe DHB's strong product portfolio, recent product launches, and ongoing marketing efforts position it for future growth. Shares are trading at an 87% discount relative to the average sector EV/Revenue of 1.4x. 

Risks

We believe the company is exposed to the following key risks (not exhaustive):

• Operates in a highly regulated industry subject to government intervention
• Competition
• Product recall and liability 
• Like any business involved in consumer product sales, we believe hefty marketing budgets are critical for growth

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