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 

• Divesting Pharmaceutical C3 Cannabinoid Compound Company: The company is divesting its subsidiary business, C3 Cannabinoid Compound Company GmbH, to Dermapharm Holding SE a European pharmaceutical company headquartered in Grünwald, Germany. An upfront payment of approx. CAD 115.5 million, subject to customary cash and debt adjustments, will be made upon the closing of the transaction in addition to an earnout payment of up to CAD 61.4 million. 
  

• Growth occasions in the U.S: The Company is bullish with its growth prospects in the United States, for both its BioSteel ready-to-drink beverages and its CBD brand portfolio. Brand recognition continues to grow, velocity is on track to meet targets, and distributor and store response has been excellent. Increased listings with national and regional chain accounts are projected to boost BioSteel's distribution in the second half of FY2022 and into FY2023.

• Increasing traction from beverages and cannabis-infused edibles: The cannabis-infused food and drinks industries are seeing strong growth, thanks to creative product offers and lucrative packaging. To meet the increased demand from the aforementioned segment, the company launched Tetrahydrocannabinol (THC) beverages in the beverage segment. The beverages, sweets, topicals, and vapes area, in particular, reported an income of CAD 9.16 million, up 30% year over year.

• Plans to acquire Wana Brands: Recently the company stated that it plans to acquire “Wana Brands” a leading cannabis edibles brand based in North America, 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 company’s product, brand, and geographic exposure to the U.S. cannabis market upon federal permissibility.

Risks associated with investment

The group's products may encounter competition from other brands, resulting in a loss of market share. Furthermore, the company's profitability and margins may suffer as a result of the prolonged process of product clearance and new improvements, as well as an increase in higher input costs. 

 Financial overview of Q2 2022 (in thousands of CAD)

Source: Company Filing

• The company announced its quarterly results, wherein it posted net revenue of CAD 131.4 million, against CAD 135.3 million in pcp. The decline was supported by lower B2B and B2C contribution along week performance from other consumer products.
• On the back of higher cost of goods sold at CAD 202.5 million against CAD 109.2 million in pcp, the group posted gross loss of CAD 71.1 million compared to profit of CAD 26.1 million in the previous corresponding period.
• The quarter was marked by lower selling, general & administrative expenses along minimized asset impairment and restructuring costs. As a result, total operating expenses stood lower at CAD 144.2 million, significantly lower than CAD 310.3 million in pcp.
• Operating loss squeezed to CAD 215.4 million, from CAD 284.3 million in pcp.
• The group minimized its net loss to CAD 11.1 million, compared to a net loss of CAD 32.1 million in pcp.
  

Valuation Methodology (Illustrative): EV to Sales

Analysis by Kalkine Group

Stock recommendation

The Company continues to expect revenue acceleration in the second half of FY2022, along stabilizing its market share of the Canadian recreational cannabis at the same time, is a key positive. Additionally, it 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. Hence considering the aforesaid facts, we recommend a ‘Spec Buy’ rating on the stock at the closing price of CAD 11.47 on January 11, 2022.

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

Technical Summary Analysis

One-Year Technical Price Chart (as on January 11, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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