Charlotte's Web Holdings Inc.

Charlotte’s Web Holdings Inc. (TSX: CWEB) is engaged in the production and marketing of hemp-based cannabidiol (CBD) wellness products. The company’s product categories include tinctures (liquid product), capsules and topical products. 

Key highlights:

• New product launch: Recently, the company launched a pet product line to its Charlotte's Web™ segment namely Skin Health & Allergy Support Chews, which would be used for dogs with sensitive skin due to seasonal allergies. The above product would help the dogs to maintain normal moisture content of their skin and would support overall the skin health from the inside out.
  

• Growth from DTC ecommerce segment: The company reported 7.4% y-o-y growth from the direct-to-consumer (DTC) ecommerce segment in H1FY21, due to increased marketing, targeted promotions, as well as incremental demand for the Company's new topical and THC-free ingestible products. We expect the above trend to continue in the coming quarters considering the persisting industry demands.
  

• Positive technical: On the daily technical chart, the stock of CWEB closed above its crucial 20-day simple moving averages indicating a potential up move in the coming trading sessions.
  

Financial Highlights:

• In Q2FY21, the company posted its revenue of USD 24.152 million, growing by 11.4% on y-o-y basis. The growth was primarily driven by an increase in the business-to-business revenue, supported by improved demand from the brick-and-mortar retail shopping activity, following the economic reopening of most regions, as they recovered from prior pandemic lockdowns related to COVID-19.
• Gross profit stood at USD 15.827 million, climbing higher from USD 11.475 million in pcp. The increase was supported by elevated revenue coupled with lower cost of sales.
• The company reported improvement in cost metrics and posted a slide in the general and administrative cost, while a surge in the sales & marketing costs coupled with higher Research and development remained as a drag.
• Net loss and comprehensive loss lowered to USD 5.388 million, as compared to a net loss of USD 14.430 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The products are relatively new to the market, and a change in consumer preference would likely impact the overall demand dynamics. The company reported higher input costs due to the higher sales and marketing expense, and the continuation of the above trend is likely to take a toll on the company’s profitability.

Valuation Methodology (Illustrative): EV to EBITDA based

Stock Recommendation:

The company showed a revival in its performance, and its topline grew to USD 47.559 million in H1FY21, reflecting a surge of 10.2% on y-o-y basis, supported by strong growth from the B2B segment. The company also reported improved operational efficiencies and posted operating expenses of USD 48.990 million in H1FY21 lower than USD 52.805 million in pcp. Adjusted EBITDA loss lowered to USD 8.588 million in H1FY21, as compared to a loss of USD 11.445 million in pcp. We have valued the stock using the EV to EBITDA based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like Tilray Inc, Green Thumb Industries Inc and Cresco Labs Inc. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 2.33 on November 9, 2021.

One-Year Technical Price Chart (as on November 09, 2021). Analysis by Kalkine Group 

*The reference data in this report has been partly sourced from REFINITIV. 

Aleafia Health Inc.

Aleafia Health Inc. (TSX: AH) is a vertically integrated and federally licensed Canadian cannabis company which offers cannabis health and wellness services and products in Canada.

Key Updates:

• Constant reduction of debt: In the recent quarters, the group posted a continuous decline in its total borrowings, which is encouraging. The above indicates prudent capital management and enhance the overall financial flexibility of the firm. Additionally, D/E equity ratio stood at 0.22x, as compared to the industry median of 0.61x.

• Product expansion: During Q2FY21, the company focused on product expansion within its cannabis brand and product portfolio, which includes favourable formats and new SKUs in the important value flower and pre-roll segments. The roll-out included the launch of an additional thirteen new product SKUs, the health and wellness brand Noon & Night, and the adult-use value brand Divvy. The above would allow its customers to choose from its wider variety of offerings and would subsequently boost volumes.

• Growth in sales volume: The company reported higher sales volume in Q2FY21, supported by solid consumer growth. Notably, during Q2FY21, the group sold 7,811 kg of cannabis, as compared to 2,545 kg in pcp.

Q2FY21 Financial Highlights:

• AH announced its quarterly results, wherein the company posted revenue of CAD 10.672 million, which climbed from CAD 9.775 million in the previous corresponding period (pcp). The surge was driven by strong demand from the Medical Cannabis and Adult-use Cannabis segments, partially offset by lower income from the Bulk Wholesale Cannabis segment.
• Gross profit stood at CAD 8.120 million, jumped from CAD 2.4 million in pcp, thanks to the elevated revenue coupled with lower inventory expenses.
• The quarter witnessed higher general & administrative costs, a rise in wages & benefits expenses, a significant surge in bad debt expense, partially offset by a decline in the business transaction costs.
• Net loss reduced to CAD 0.036 million, as compared to a net loss of CAD 4.020 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report) 

Risk: The company witnessed a rise in the input costs, which has resulted to suppressed bottom-line. Hence, continuation of the above trend would lead to decline in profitability and cash flows. 

Valuation Methodology (Illustrative): EV to Sales based valaution

Stock Recommendation:

The adult-use segment saw tremendous surge in the recent past, supported by robust demand dynamics from its everyday cannabis brand Divvy coupled with several new launches of several medical products such as Black Widow CBD 14g Dried Flower and FLO 14g Dried Flower. Notably, the above products reported a solid response from the consumers, which has resulted in a ~93% q-o-q increase in revenue from the above segment. We expect the above trend to continue in the coming days, which would subsequently lead to improved performance. We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like HCA Healthcare Inc, OrganiGram Holdings Inc and IMAC Holdings Inc. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 0.265 on November 9, 2021.

One-Year Technical Price Chart (as on November 09, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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