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GURU Organic Energy has big upside, says Echelon Capital Markets

Echelon Capital Markets analyst Amr Ezzat is charting an attractive growth trajectory for GURU Organic Energy (GURU Organic Energy Stock Quote, Chart, News, Analysts, Financials TSX:GURU), saying in an update to clients on Tuesday the energy drink company's newly announced strategic partnership with PepsiCo will extend its reach across Canada.

Montreal-based GURU Organic markets organic energy drinks in Canada and the United States, with currently over 21,000 points of sale. Founded in 1999, the company has products under the GURU Original, GURU Lite, GURU Energy Water, GURU Matcha and GURU Yerba Mate names.

The company announced on Tuesday the closing of a previously announced bought deal offering and concurrent private placement for total gross proceeds of $92.5 million. The bought deal offering was for 3.8 million shares at $16.00 per share for $60.5 million and the private placement involved about 2.0 million shares at $16.00 per for $32.0 million. Management said it will use net proceeds for marketing and selling expenses related to its PepsiCo distribution agreement along with sales and marketing expenses, brand awareness and market expansion costs in the US.

'We are delighted by the success of and interest in the Offering and look forward to the start of our distribution relationship with PepsiCo Beverages Canada as we pursue our expansion plans in Canada and the US, said GURU President and CEO Carl Goyette in a press release.

Looking at industry trends, Ezzat said energy drinks are now the fastest-growing non-alcoholic beverage category at about an eight per cent CAGR and representing a $15-billion industry in North America alone. The analyst said millennials and Gen Z are driving consumption in the category and are also demanding healthier alternatives.

Ezzat said GURU, which is currently the fastest-growing energy drink brand in Québec convenience and gas stores, is capitalizing on these trends and is on pace to more than double its revenues in three years.

'In early 2018, the Company began implementing its sales strategy in select California markets resulting in early success as evidenced by strong growth in conventional grocery and convenience stores. Namely, GURU is currently the fastest-growing energy drink brand and the top organic energy drink in Bay Area convenience stores (excluding performance energy and private label brands),' Ezzat wrote.

'Our long-term modelling sees GURU gain 1.3-per-cent market share penetration in North America in ten years, yielding revenues of ~$400 million. We note the Company's current market share in its core QC market is 13-15 per cent and, while its market share is negligible outside of QC, the Company has aggressively grown in number of doors, showcasing early success in its expansion plans,' he said.

Ezzat also commented on GURU's fiscal second quarter 2021 financials for the period ended April 30, 2021, delivered in mid-June. There, revenue came in at $7.1 million compared to $4.0 million a year earlier and a little higher than both Ezzat's estimate at $6.9 million and the consensus call at $6.6 million. Revenues in Canada grew by 89.2 per cent year-over-year while US revenues were up 22.2 per cent.

On earnings, GURU's Q1 adjusted EBITDA was negative $833,000 compared to negative $693,000 a year earlier, while Ezzat had called for EBITDA of negative $2.5 million and the Street estimated negative $2.2 million. GURU finished the quarter with cash and credit facilities of almost $35 million, while the company added over 800 points of sale over the quarter through The Fresh Market, Weis Markets and Raleys in the US and through Canadian Tire Gas+ in Canada.

Ezzat noted that GURU has already delivered quarters around the 30-per-cent EBITDA margin level, whereas industry bellwether Monster Beverage only reached that stage at the US$350-million revenue mark in 2005.

Ezzat sees GURU hitting $28.2 million in revenue for its fiscal 2021 (year end October 31) and $41.7 million for fiscal 2022, while he thinks the company's adjusted EBITDA will go from negative $6.7 million in its 2021 to negative $5.4 in 2022.

With the update, Ezzat reiterated his 'Buy' rating and $23.50 price target, which at the time of publication represented a projected one-year return of 30.6 per cent.

GURU announced the PepsiCo deal on June 14, an exclusive national distribution agreement, effective October 4, 2021, which will see PepsiCo sell, distribute and merchandise GURU's energy drinks to convenience, foodservice and retail customers nationwide for an initial term of ten years, subject to five-year renewal periods. GURU has granted PepsiCo warrants of up to 1,650,000 shares in tranches based on commercial milestones.

Calling the deal a strong endorsement of GURU's brand profile, Goyette said in a press release, 'Partnering with PepsiCo Beverages Canada at this stage of our growth for the Canadian distribution of our better-for-you energy drinks is a game changer for GURU and has the potential to accelerate our sales and distribution plans.'