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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.
In FY2023, 68% of sales came from the U.S., and the Middle East, and 32% from Canada. DHB’s products are available in over 30k+ stores including established retail/pharmacy chains such as Walmart (NYSE: WMT), Kroger (NYSE: KR), 7-Eleven, Sobeys (TSX: EMP), Rexall (NYSE: MCK), London Drugs, Shoppers Drug Mart (TSX: L), and Amazon Canada (NASDAQ: AMZN).
In May 2023, DHB granted Canopy Growth (TSX: WEED; MCAP: $549M) an exclusive licence to manufacture/sell cannabis-infused LivRelief topicals in Canada. DHB will start receiving licensing fees from Canopy in the coming months. Shares are trading at just 0.3x revenue vs the Personal Care Products sector average of 3.2x, reflecting a 78% discount. We believe the market is overlooking DHB’s vast distribution network. A major upcoming development includes the potential launch of LivRelief in the U.S. next year.
Background
DHB’s product portfolio consists of sleep aid/anxiety relief formulations, as well as 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 in 30k+ stores in the U.S. and Canada, including major retailers and pharmacy chains
Extensive Distribution
Source: Company
DHB’s annual revenue per store is approximately $325, which we believe is on the higher end of small health and wellness companies; larger brands generate $1k+
Financials (Year-End: June 30th) 
In FY2023, revenue was up 20% YoY, beating our estimate by 10%
Revenue growth came from strong sales of Dream Water products
Gross margins improved 11 ppt to 53%, in line with our estimate
EBITDA turned positive; EPS and FCF improved as well, but remained negative; EPS was exactly in line with our estimate
In FY2023, DHB spent 8% of revenue on marketing, 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
Reasonably healthy balance sheet
We believe the company will not have to pursue any financings
FRC Projections and Valuation
We believe near-term revenue growth will be driven organically, plus licensing fees from Canopy
Source: FRC
As FY2023 was in line, we are maintaining our EPS forecasts
Source: FRC
Our DCF valuation is $0.09/share (unchanged)
For conservatism, we are not assigning any value to DHB’s transdermal technology at this time
Comparables Valuation
Source: FRC/S&P Capital IQ
DHB is trading at a 78% discount (previously 49%) 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). We continue to believe that DHB’s extensive distribution network is its biggest strength. We believe the company should be able to ramp up revenue through new product acquisitions.
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
