Disclosure: Delivra Health Brands Inc. has paid FRC a fee for research coverage and distribution of reports. See last page for other important disclosures, rating, and risk definitions.
Highlights
DHB is up 75% since our previous report in December 2023. Check out our recent interview with DHB's CEO for in-depth insights into the company's products, marketing strategies, competitive landscape, and upcoming plans.
Q2-FY2024 (ended December 2023) revenue was down 14% YoY, but gross profit was up 12% YoY, driven by cost reductions stemming from improved terms with distributors. H1-FY2024 revenue was up 39% YoY, and gross profit was up 65% YoY.
As Q1 revenue was up 112% YoY, the decline in Q2 may appear concerning. However, it is important to note that DHB’s revenue fluctuates quarterly due to the timing of shipment of sales orders to large customers. We are maintaining our FY2024 revenue forecast of $12.44M, a 27% YoY increase. Gross margins improved 13 pp to 54%, in line with our estimate.
In H1-FY2024, 68% of sales came from the U.S., and the Middle East, and 32% from Canada. DHB sells sleep aid products through its Dream Water brand, and pain relief products through its LivRelief brand. Products are available at over 30k+ distribution points, including established retail/pharmacy chains such as Shoppers Drug Mart, Walmart (NYSE: WMT), Kroger (NYSE: KR), Circle K (TSX: ATD), Casey’s (NASDAQ: CASY), Sobeys (TSX: EMP), North American airports, and online platforms such as Amazon (NASDAQ: AMZN).
The Dream Water brand is launching a new line of sleep gummies in Canada. In Q2, LivRelief added three new CBD-infused cream products licensed and distributed by Canopy Growth (TSX: WEED) in cannabis stores across Canada.
In December 2023, DHB closed a $0.90M equity financing, with insiders subscribing to 60% of the offering, indicating their optimistic outlook.
The company has ramped up its digital marketing efforts this year. In H1- FY2024, marketing expenses increased 9 bp YoY to 13% of revenue. We expect these efforts, along with new product launches, to drive revenue growth this year.
A major upcoming development includes the potential launch of LivRelief in the U.S. DHB is trading at just 0.8x revenue vs the Personal Care Products sector average of 3.1x.
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.
Products
Follows an asset-light model by outsourcing manufacturing and packaging to entities in North America
Two 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
Extensive Distribution
Source: Company
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)
We are maintaining our FY2024 revenue forecast of $12.44M
In Q2-FY2024, revenue was down 14% YoY due to the timing of shipments to large customers
H1-FY2024 revenue was up 39% YoY
Gross margins improved 13 pp to 54%, in line with our estimate
EBITDA and EPS deteriorated due to lower revenue, and higher marketing expenses
Marketing expenses increased 5 pp QoQ to 16% of revenue, but remained significantly lower than the 20%-35% range of comparables
According to management, their focus on digital marketing allows them to maintain a low budget; nonetheless, we believe DHB must raise its marketing budget to remain competitive with its peers
Source: Company Filings, FRC
FRC Projections and Valuation
We are maintaining our revenue estimates, but lowering our EPS estimates due to higher marketing expenses
We believe near-term revenue growth will be driven organically, plus licensing fees from Canopy
Source: FRC
Our DCF valuation declined from $0.094 to $0.09/share amid lower near-term EBITDA forecasts
Comparables Valuation
Source: FRC/S&P Capital IQ
DHB is trading at a 28% discount (previously 69%) relative to its comparables
Using the average sector EV/Revenue, we arrived at a comparables valuation of $0.05/share (unchanged)
We are reiterating our BUY rating, and maintaining our fair value estimate of $0.07/share (the average of our DCF and comparables valuations). Shares are trading favorably at 0.8x revenue vs the Personal Care Products sector average of 3.1x. We anticipate record revenue and EBITDA this year, driven by organic growth, new product launches, and a bolstered marketing budget.
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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