Canopy Growth Corporation

Canopy Growth Corporation (TSX: WEED) cultivates and sells medicinal and recreational cannabis, and hemp, through a portfolio of brands that include Tweed, Spectrum Therapeutics, and CraftGrow. Apart from Canada, Canopy has distribution and production licenses across several other countries.

Key Highlights:

• New product launch: Recently, the company launched CBD vape, whisl, which is a sleek, nicotine-free CBD vaporizer, which is designed to deliver the wellness effects of CBD. This product has a customization option along with an option of interchangeable pods.
• Growing traction from beverages and cannabis-infused edibles: The company is witnessing strong growth from the cannabis-infused edibles and beverage segments, supported by innovative product offerings and lucrative packaging. The company also expanded its popular Twd. gummy line and introduced new flavors. Within the beverage segment, the company launched Tetrahydrocannabinol (THC) beverages in order to cater for the growing demand from the above segment. Notably, the beverages, edibles, topicals & vapes segment reported an income of CAD 9.160 million, reflecting a 30% growth on y-o-y basis.
• Ample liquidity to support future operations: The company reported impressive liquidity with cash & cash equivalents of CAD 559.8 million, while its short-term investments were accounted at CAD 1.5 billion. The company has the additional option of CAD 40 million of revolving debt facility along with USD 500 million under the credit facility. The current liquidity level seems to be sufficient to meet the working capital requirements and conducting expansion strategies.

Q1FY22 Financial Highlights:

• WEED announced its quarterly results, wherein the company posted revenue of CAD 155.423 million, jumped from CAD 119.088 million in pcp. The growth was supported by strong momentum from dry bud and beverages, edibles, topicals and vapes segments.
• Gross margin stood higher at CAD 27.238 million, jumped from CAD 6.495 million in pcp. The increase was primarily due to elevated revenue, partially offset by a slightly higher cost of sales.
• The quarter was marked by an increase in selling, general & administrative expenses, while higher asset impairment and restructuring costs acted as a drag. Total operating expenses stood higher at CAD 214.949 million, significantly higher than CAD 178.871 million in pcp.
• Operating loss widened to CAD 187.711 million, from CAD 172.376 million in pcp.
• The group turned profitable and posted a net profit of CAD 389.995 million, as compared to a net loss of CAD 128.322 million in pcp.

Q1FY22 Income Statement Highlights (Source: Company Report)

Risks: The products of the group might face competition from other brands, which may lead to a decline in market share.

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation:

The company is focusing on marking its footprints across the U.S. market and has built-out multiple routes for the THC market within the country. Moreover, the company is also focusing on taking the advantage of additional opportunities from the US market.  The group achieved CAD 38 million of cost savings in Q1FY22 and is focusing on reporting CAD 150 million to CAD 200 million of cost savings in FY23. We have valued the stock using the EV to sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers such as Brown-Forman Corp, Cronos Group Inc and Sundial Growers Inc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 18.10 on September 22, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on September 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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