Charlotte's Web Holdings Inc.

Charlotte’s Web Holdings Inc. (TSX: CWEB) is engaged in the production and marketing of hemp-based cannabidiol (CBD) wellness products. The company’s product categories include tinctures (liquid product), capsules and topical products. 

Key Updates:

• First International Harvest with Patented Hemp Cultivars in Canada: Recently, the company successfully commenced its first-ever international hemp crop in Canada. The above would produce high naturally occurring cannabidiol ("CBD") in shorter northern climate growing seasons. Notably, the company got approval from the Health Canada's List of Approved Cultivars for outdoor cultivation in Canada. With the above development, the company would continue to extract and manufacture the final product through strategic third-party relationships.

• Hint of demand revival: In the recent past, the company witnessed a demand revival and hence, the top-line grew 4.3% on y-o-y basis to USD 71.263 million, supported by consumers returning to brick and mortar retail shopping following the economic reopening of COVID-19 lockdowns, higher sales volume from the acquisition of Abacus. Moreover, increased in marketing, targeted promotions, coupled with higher demand for the Company’s new topical and THC-free ingestible products, also supported the growth. Continuation of the above trend is likely to support the upcoming performance.
  

• Technical showing a possible rebound: On a daily chart, the 14-days RSI of the CWEB stock stood at 41.94, indicating a price rebound from its recent lows. Moreover, the stock closed near the lower range of the 20-days Bollinger band, which also illustrates a possible appreciation in the coming trading sessions.

Technical Price Chart (as on December 08, 2021). Source: REFINITIV, Analysis by Kalkine Group

Q3FY21 Financial Highlights:

• In Q3FY21, the company posted its revenue of USD 23.704 million, slide from USD 25.156 million in pcp. The decline was primarily due to a 9.3% y-o-y decline in Direct-to-consumer (DTC) revenue at USD 15.175 million.

• Gross profit stood at USD 14.915 million, up from USD 14.757 million in pcp, supported by elevated revenue coupled with a lower cost of sales.

• The company reported improvement in cost metrics and posted a slide in the general and administrative cost and lower sales & marketing costs. Additionally, a decline in research & development also supported the company’s profitability.
• Net loss and comprehensive loss lowered to USD 0.913 million, as compared to a net loss of USD 6.539 million in pcp.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: The products are relatively new to the market, and a change in consumer preference would likely impact the overall demand dynamics.

Valuation Methodology (Illustrative): EV to EBITDA based

Stock Recommendation:

The company has successfully reduced its operating loss to USD 28.470 million in 9MFY21, as compared to a loss of USD 39.806 million in pcp, supported by prudent cost management. Notably, general & administrative costs decline 20.1% on y-o-y basis to USD 43.904 million in 9MFY21 due to lower legal and professional services costs and lower payroll taxes and employee benefits expenses. We have valued the stock using the EV to EBITDA based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like Trulieve Cannabis Corp, Green Thumb Industries Inc etc. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 1.61, at 10:05 am at Toronto Time on December 09, 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 December 09, 2021). Analysis by Kalkine Group

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

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