Q2 Revenue Rebound: Building Momentum with Increased Marketing

• Earlier this month, DHB completed a 1:10 share consolidation.  
• Q2-FY2025 (ended December 2024) revenue grew 34% YoY, 4% below our estimate, driven by orders from large customers, and a stronger US$. We had projected a Q2 rebound, as Q1 revenue was unusually low due to order timing mismatches.
• Management remains confident in achieving YoY revenue growth this year, following four consecutive years of growth: 2% in FY2021 and FY2022, 20% in FY2023, and 26% in FY2024.
• DHB’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 Q2, 75% of sales came from the U.S., and the Middle East (Q1-FY2025: 79%), and 25% from Canada. 

• Higher marketing expenses weighed on EBITDA, EPS, and free cash flows. Marketing costs rose 5 pp YoY to 21% of revenue in Q2, reflecting management's optimism for the coming quarters. We believe recent marketing campaigns should drive growth in H2.
• We expect FY2025 revenue to be driven by organic growth and new products like Dream Water Sleep Gummies and Dream Water Immunity Shots, supported by increasing awareness of sleep’s role in physical and mental health.
• Upcoming catalysts include new product launches, geographical expansion, and the potential launch of LivRelief in the U.S.
• DHB’s valuation remains attractive, trading at just 0.25x revenue, while comparable Personal Care companies trade at 1.20x on average, a 79% discount.

Price Performance (1-year)

Overview

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) 

Q2-FY2025 revenue grew 34% YoY,  missing our estimate by 4%. Nonetheless, the  quarterly recovery is encouraging, given that Q1 revenue was down 10% YoY

Historically, quarterly revenue has been volatile due to the timing of orders from large customers. Gross margins were down 9 pp, driven by a higher proportion of low-margin product sales, but were in line with our estimate

Marketing expenses were up 5 pp YoY to 21% of revenue, compared to 10%-20%  for industry peers (Source: S&P Capital IQ). SG&A expenses were up 4% YoY, primarily due to higher head count 

Higher marketing expenses impacted EBITDA, EPS, and free cash flows

Healthy balance sheet. No outstanding options/warrants are in-the-money

FRC Projections and Valuation 

It is estimated that the global sleep aids market will grow from US$78B in 2024, to US$163B in 2034, reflecting a CAGR of 5.4%

It is estimated that the U.S. pain management therapeutics market will grow from US$28B in 2024, to US$39B by 2033, reflecting a CAGR of 3.7% 

As Q2 revenue was slightly lower than expected, we are lowering our full-year revenue and EPS estimates

As a result, our DCF valuation declined from $0.98 to $0.91/share

Comparables Valuation

DHB is among the most undervalued stocks on our list of companies focused on Personal Care products. The average sector forward EV/Revenue is down 15% since our previous report 

DHB is trading at a 79% discount to  comparables. Using the average sector EV/Revenue, we arrived at a comparables valuation of $0.55/share (previously $0.70/share)

We are reiterating our BUY rating, while adjusting our fair value estimate from $0.90 to $0.74/share (the average of our DCF and comparables valuations). We were pleased to see revenue rebound in Q2, albeit at a slightly slower pace than expected. Although higher marketing expenses weighed on EPS, we believe they will pay off in H2, and drive growth alongside new product launches. We anticipate the US$ will remain strong in the near term, benefiting DHB as 75% of revenue comes from the U.S. The current valuation indicates the market is not recognizing the company's growth potential. 

Risks

We are maintaining our risk rating of 3 (Average)

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
• Geopolitical and tariff risks: Despite ongoing geopolitical risks and tariff concerns, we believe DHB's localized manufacturing is expected to minimize exposure to US-Canadian tariffs.

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