Canopy Growth Corporation

Canopy Growth Corporation (TSX: WEED) is world-leading diversified cannabis, hemp and cannabis device company, offering distinct brands and curated cannabis varieties in dried, oil and Softgel capsule forms, as well as medical devices.

Q1FY21 Financial Highlights: Canopy Growth Corporation impresses with its quarterly results, wherein the Company reported net revenue of CAD 119.088 million, reflecting an increase of 22% on y-o-y basis, driven by higher medical cannabis sales in Canada and Germany coupled with the positive impact of the acquisition. The growth was partially offset by a lower Canadian Recreational cannabis income on account of restrictions imposed due to COVID 19 pandemic. The Company reported a lower operating expense of CAD 178.871 million, as compared to CAD 233.009 million, a year ago. The decline in the operating expense is due to a lower SG&A expense and significantly lower share-based compensation. Operating loss narrowed to CAD 172.376 million compared to CAD 214.719 million. The Company reported a net loss of CAD 128.322 million as compared to CAD 194.051 million in pcp. Cash and cash equivalents were recorded at CAD 975.87 million, while total assets were reported at CAD 6,845.83 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Products are new to the consumers and may not receive the acceptability from the consumer or might not meet the consumer requirement. Further, any regulatory changes related to cannabis would hamper the company’s operations.

Stock Recommendation: The WEED stock corrected ~18% so far this year on account of a weak investor sentiment due to the ongoing COVID 19 crises. The Company witnessed tremendous response from for the dried flower products, particularly in Germany while the acquisition of C3 in Germany has enhanced the Company’s footprint across the Dronabinol market. The Company’s performance has been well supported by strategic acquisitions of S&B vaporizer, which has resulted in an improved business prospect across the United States. The quarter witnessed a mixed result within the Canada geography, wherein it saw a 19% y-o-y growth within medical revenue and a 12% dip in the recreational B2C net sales due to stores closures across several areas. To enhance its footprints across the US markets, the Company launched its online website ShopCanopy. We believe, the Company is well poised to take advantage of the growing demand for cannabis products by offering innovative products like BioSteel RTD non-CBD beverages etc. The Company has a strong pipeline of products like Martha Stewart branded health and wellness CBD products which are expected to be launched in coming days. The stock closed above the 100-days simple moving average of CAD 22.42, indicating a bullish trend. On the valuation front, the stock is trading at a forward EV to Sales multiple of 13.9x against the industry (Pharmaceuticals) average of 26.5x. Hence, considering the recent price movement, technical parameters, reopening of stores and new product pipeline, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 22.56 on August 11, 2020.

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

Cronos Group Inc.

Cronos Group Inc. (TSX: CRON) cultivates and sells medicinal and recreational cannabis through its medicinal brand, Peace Naturals, and its two recreational brands, Cove and Spinach.

Q2FY20 Financial Highlights: CRON reported its quarterly results, wherein the Company posted higher net revenue of USD 9.883 million as compared to USD 7.653 million in the previous corresponding period (pcp). The strong momentum was underpinned by continuing growth from the e-commerce segment, partially offset by a lower performance from the retail segment due to store closure. The Company reported a gross loss of USD 2.953 million as compared to a gross profit of USD 4.093 million in pcp. The decline was primarily attributable to a significantly higher cost of sales coupled with inclusion of inventory write-down. The Company reported higher operating expenses of USD 31.802 million as compared to USD 20.848 million in pcp due to a surge sales and marketing, research and development and general and administrative expenses, partially offset by a lower share-based payment. The quarter was marked by a loss on revaluation of derivative liabilities amounting to USD 35.880 million as compared to a gain of USD 197.31 million in pcp. Impairment loss on goodwill stood at USD 40 million during the quarter while the Company posted interest income of USD 3.734 million as compared to USD 9.442 million in pcp. The Company reported a net loss of USD 107.703 million as compared to a profit of USD 185.888 million in pcp.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: The Products are new to the consumers and may not receive the acceptability from the consumer or might not meet the consumer requirement. Further, any regulatory changes related to cannabis would hamper the company’s operations.

Valuation Methodology: EV to Sales Based (Illustrative)

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

Stock Recommendation: The stock of CRON corrected ~26% so far this year due to weak market sentiment on account COVID-19 pandemic. The performance of the Company came as a mixed bag. The quarter was marked by increased demand for the adult-use cannabis coupled with the launch of cannabis vaporizers in the Canadian market. The Company witnessed a significant rise in inventory write-down and is expected the trend is to continue in the near-term, which is a key challenge for the business. Furthermore, an increase in the production costs would weigh high on the profitability too. The Company launched its products across the U.S. and witnessed decent feedback, which is commendable. However, the continuation of the rise in the sales and marketing costs is likely to take a toll on the profitability in the coming days. 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 downside potential (in % terms). For the said purpose, we have considered peers like Canopy Growth Corp and OrganiGram Holdings Inc and Aurora Cannabis etc. Hence, considering the aforesaid facts, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 7.39 on August 11, 2020.

CRON daily Technical Chart. Source: Refinitiv, Thomson Reuters

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