Driving Revenue Growth via New Products & a Bolstered Marketing Budget

Report Highlights

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