The Green Organic Dutchman Holdings

The Green Organic Dutchman Holdings (TSX: TGOD) operates as a cannabinoid-based research and development company in Canada. The company's only operating segments being the production and distribution of cannabis and related products and Hemp related products.

Key Highlights:

• The company has collaborated with Canaccord Genuity Corp. and Mackie Research Capital Corp. to increase the size of its previously announced bought deal financing. As per the revised deal, the underwriters have agreed to purchase, an aggregate of 39,286,000 units at a price consideration of CAD 0.28 per unit.
• The company enjoys economies of scale and has registered as the first producers to successfully grow organic cannabis at scale. The group us targeting cash cost per gram of lower than CAD 1 in the second half of FY20, which is impressive. Furthermore, the company has a hybrid greenhouse advantage over its peers which offers advanced humidity, temperature and environmental controls relative to conventional greenhouses and natural light availability & facility automation.

Q3FY20 Financial Highlights:

• TGOD announced its quarterly results, wherein the company posted revenue of CAD 5.710 million, significantly higher than CAD 2.612 million in the previous corresponding period (pcp). The increase was primarily driven by higher sales of cannabis products across Canada, as the company expanded to Quebec market with the launch of the Company’s Highly Dutch brand.
• Gross profit stood higher at CAD 3.969 million, as compared to CAD 1.695 million in pcp, driven by higher sales and a higher gain from changes in fair value of biological assets amounting CAD 3.547 million, as compared to CAD 0.327 million in pcp.
• Loss from operations stood lower at CAD 6.338 million, as compared to CAD 19.810 million in Q3FY19.
• Net loss widened drastically to CAD 76.244 million, from CAD 20.303 million in pcp, due to inclusion of impairment charge for non-financial assets amounting CAD 67.837 million.
• The company reported cash and cash equivalent of CAD 4.100 million, while total assets stood at CAD 211.676 million.

Risks: The products are relatively new to the customers, and arrival of any new alternatives might dampen the sales volumes.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

Combined with increased infuser sales, quarter over quarter, the company expects the launch of the Highly Dutch brand and Unite vapes into other provinces, which is likely to improve business prospects and further drive the company’s overall performance. We have valued the stock using EV to Sales based relative valuation approach and arrived at a target price offering low single-digit downside potential (in % terms). We have considered peers like Hexo Corp, Valens Company Inc., and Supreme Cannabis Company Inc, etc. as a peer group. Considering the aforesaid facts, we recommend a ‘Watch’ stance on the stock at the closing price of CAD 0.265 on December 10, 2020.

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

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