MediPharm Labs Corp.

LABS Stock Gets Beaten Down: MediPharm Labs Corp. (TSX: LABS) is a licensed producer for cannabis oil. As on 19 May 2020, the market capitalization of the company stood at CAD239.80 million.

Quarterly Update (For the Period Ended 31 March 2020): The global cannabis stocks is experiencing a material impact from the outbreak of the coronavirus, whereas, MediPharm Labs is well-positioned with GMP certification, advanced capabilities for new and innovative products formats and formulations, and a global supply chain to accelerate new business opportunities to drive future growth. During the three months ended March 2020, LABS progressed in advancing the roll-out of new cannabis 2.0 products and SKUs for its white-label customers and became one of the first companies to begin the sale of vaporizer cartridges. The company has also launched its first branded products to deliver high-quality, innovative offerings to consumers in the medical and adult-use markets across Canada. The company has recently announced that it has secured its first European white-label cannabis supply agreement with Therismos Limited, wherein it will supply a range of cannabis oil products.  

Impact of COVID-19: The Canadian operations of the company were declared essential services. This is inclusive of manufacturing, fulfillment, and distribution. LABS continue to maintain adequate inventory to supply its customers and meet demand. However, distributors and private retailers have reduced on-site staff, resulting in decreased delivery and reduced purchase orders for white-label products and other branded products. The extent of the financial and operational impact of COVID-19 will be dependent on various developments, including the duration and magnitude of the outbreak.

Stock Recommendation: The company is maintaining decent liquidity levels and has shown financial strength to prudently develop the business in the long run. As per TSX, the stock is trading close to its 52-week low of CAD1.21, proffering a decent opportunity for accumulation. The stock gave a return of 3.57% in the past one month. On a TTM basis, the stock is trading at an EV/Sales multiple of 1.7x, lower than the industry median (Healthcare) of 6.2x. Considering the attractive trading levels, decent returns in the past one month, lower EV/Sales multiple and impact of COVID-19, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 1.78 on 19 May 2020.

LABS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Valens GroWorks Corp.

Record Revenue and Profitable First Quarter: Valens GroWorks Corp. (TSX: VLNS) is a developer and manufacturer of cannabinoid-based products. As on 19 May 2020, the market capitalization of the company stood at CAD301.39 million.

Quarterly Performance (For the Period Ended 29 February 2020): During the first quarter ended 29 February 2020, the company has hit many milestones and reported a significant increase in revenue to CAD32.0 million, up from CAD2.2 million in the first quarter of 2019. This resulted in an increase in gross profit CAD18.1 million as compared to CAD0.9 million in the first quarter of 2019. In the same time span, the company reported a positive adjusted EBITDA, which stood at CAD14.3 million. The first quarter also saw an increase in revenue per gram of input, which is mainly because of the white label strategy. The company also reported a strong balance sheet with cash balance of CAD44.3 million. Throughout the quarter, the company leveraged the flexibility of its extraction platform, helping its customers to navigate increasing market complexity. The company launched several new product formats such as hydrocarbon-based offerings, which was intended to bring high-demand products to customers.  

Quarterly Financial Performance (Source: Company Reports)

Valens Company Enters Australia's Cannabis Market with Five Year Distribution Agreement: The company has recently signed a distribution agreement with Cannvalate Pty Ltd. for a term of 5 years. This partnership provides Valens with strategic access to Australia's strong and fast-growing cannabis market. The company is also starting the production of hand sanitizer liquid with an initial 1,300 litre-batch to help alleviate product supply shortages because of the COVID-19 health crisis.

What to Expect: The agreement with Cannvalate Pty Ltd is likely to maximize incremental revenue potential of the company, while spending minimal upfront capital. Australia’s medical patient base is expected to offer an attractive return for the shareholders with potential upside.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The retail demand for cannabis has surged during the COVID-19 pandemic and hence, the company is experiencing strong white label sales. The stock is trading close to its 52-week low level, proffering a decent opportunity for investors to enter the market. The stock has given a return of 2.18% in the past one month and is well-positioned for further growth. Considering the trading levels, decent returns in the past one month, record revenue and expansion of the company in Australian market, we have valued the stock using EV/Sales multiple based illustrative relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered OrganiGram Holdings Inc, Rubicon Organics Inc, WeedMD Inc, etc., as peers. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 2.360 on 19 May 2020.

VLNS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

HEXO Corp.

Increasing Production and Improved Operations: HEXO Corp (TSX: HEXO) is a consumer-packaged goods cannabis company that creates and distributes, easy-to-use and easy-to-understand products to serve the Canadian cannabis market. As on 19 May 2020, the market capitalization of the company stood at CAD251.05 million.

Quarterly Performance (For the Period Ended 31 January 2020): For the second quarter ended 31 January 2020, the company reported an increase in production levels to 22,305 kg from 16,107 kg in the previous quarter. In the same time span, the company focused on improving its operations and expanding distribution across Canada. During the quarter, net revenue of the company went up by of 17% to CAD17 million. However, the company witnessed a significant loss of CAD298.2 million. In the same time span, the company reported normalized operating expenses of CAD28.1 million and continues to reduce the spending levels to refocus operations on becoming adjusted EBITDA positive. As on 31 January 2020, the company held cash and cash equivalents of CAD81.4 million.

Quarterly Financial Performance (Source: Company Reports)

Molson Coors and HEXO Corp Expand Partnership: The company has formed a joint venture with Molson Coors Beverage company to explore opportunities for non-alcohol hemp-derived CBD beverages in Colorado. The companies have built a great partnership and is likely to produce some of the best adult non-alcohol beverage brands in the Canadian market. HEXO has announced that the underwriters have agreed to purchase 55,600,000 units from the company for total gross proceeds of CAD50,040,000. Each unit is comprised of one common share and one half of one common share purchase warrant. In addition, it has granted a 30-day option to purchase up to an additional 8,340,000 units to the underwriters. HEXO expects to use the net proceeds for working capital and other general corporate purposes.

Stock Recommendation: HEXO remains operational and is working diligently to allow the company to maintain the capacity needed to fulfil orders. The stock has given negative returns of 62% in the past three months but a positive return of 5.56% in the last one month. As per TSX, the stock is trading at attractive levels, close to its 52-week low of CAD0.05. Considering the current trading levels, volatility in returns, and significant quarterly losses, we suggest investors to keep an eye on the business activities and hence, give a ‘Watch’ stance on the stock at the closing market price of CAD 0.73 on 19 May 2020.

HEXO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.