Canopy Growth (TSX: WEED) is a Canadian company cultivates and sells medicinal and recreational cannabis, and hemp, through a portfolio of brands that include Tweed, Spectrum Therapeutics, and CraftGrow.

Key Highlights 

• Plans to acquire Wana Brands: Recently the company stated that it plans to acquire Wana Brands which is the leading cannabis edibles brand in North America based on market share, with the profitable business and a track record of generating strong revenue growth and category-leading gross and EBITDA margins. We furthermore believe that Wana’s leadership position and ongoing expansion across the U.S. would bolsters Canopy Growth's product, brand, and geographic exposure to the U.S. cannabis market upon federal permissibility.
  

• New product launch: Recently, the company launched CBD vape, 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.
  

Financial overview of Q1 2022

Source: Company

• WEED announced its quarterly results, wherein the company posted revenue of CAD 155.4 million, jumped from CAD 119.0 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 27.2 million, jumped from CAD 6.4 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 214.9 million, significantly higher than CAD 178.8 million in pcp.
• Operating loss widened to CAD 187.7 million, from CAD 172.3 million in pcp.
• The group turned profitable and posted a net profit of CAD 389.9 million, as compared to a net loss of CAD 128.3 million in pcp.

Risks associated with investment

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 in the US market through the acquisition of Wana Brands.  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 Lexaria Bioscience Corp. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 16.52 on October 15, 2021.

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

One-Year Technical Price Chart (as on October 15, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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