Canopy Growth Corporation

Improving Business Prospects: Canopy Growth Corporation (TSX: WEED) manufactures and distributes medicinal and recreational cannabis, and hemp products, through a portfolio of brands that include Tweed, Spectrum Therapeutics, and CraftGrow.

On May 01, 2020, Constellation Brands exercised 18,876,901 warrants to purchase common shares of WEED. Constellation Brands’ exercise of warrants indicates the company’s confidence in Canopy Growth Corporation.

Q3FY20 Financial Highlights: For the period ended December 31, 2020, WEED reported revenue of CAD 123.76 million, as compared to CAD 83.05 million in pcp, supported by improved demand from Canadian recreational business-to-business channel followed by a decent growth in the newly added retail stores. Gross margin stood at CAD 60.23 million, significantly higher from CAD 15.88 million in Q3FY19. Loss from operation widened to CAD 171.52 million from CAD 157.24 million in pcp, due to higher sales & marketing, General & administration, share-based compensation expense and depreciation expense. The Company reported a net loss of CAD 124.17 million, as compared to a net profit of CAD 74.86 million in the previous corresponding period.

Q3FY20 Financial Highlights (Source: Company Reports)

Valuation Methodology (Illustrative): EV/Sales - Based Relative Valuation

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

Stock Recommendation: The WEED stock has corrected ~66% and ~15% in the last one year and six months, respectively. During the last one month, the stock made a recovery rally and generated a ~18% return, outperforming the index by ~4%. The company’s collaboration with Constellation Brands opens new growth avenues. WEED can utilize the wide distribution and logistics support of Constellation Brands and increase its brand presence. The Company has launched innovative products within the beverage segments and is likely to be benefitting from the collaboration. In the recent past, most of the cannabis-based companies witnessed a surge in demand, which bodes well for future growth. We expect continued demand of cannabis product in the coming quarters. We valued the stock using EV/EBITDA-based valuation metrics. The stock is currently trading at a forward EV/Sales multiple of 10.2x. We expect the multiple to expand in the future based on the above-mentioned facts and arrived at a target price offering a double-digit upside potential (in % terms). We recommend ‘Buy’ on WEED stock at the closing price of CAD 22.17 on 5 May 2020.

WEED One-Year Daily Price Chart (Source: Thomson Reuters)

Tecsys Inc.

Growing Demand for Cloud-based Products to drive Growth: Tecsys Inc. (TSX: TCS) is an information technology company, which offers industry-leading supply chain management software to corporates.

Recently, the company announced the appointment of Rani Hublou to the company’s board.

Q3FY20 Financial Highlights: TCS came up with a decent set of numbers, wherein, the Company reported total revenue of CAD 26.84 million, as compared to CAD 18.79 million in the previous corresponding period. The increase was majorly driven by improved performance from cloud, maintenance & subscription segment, professional services and third-party products. Gross profit stood higher at CAD 12.83 million, as compared to CAD 9.44 million in Q3FY19, thanks to the higher revenue. Profit from operations stood at CAD 1.39 million, as compared to a loss of CAD 1.69 million in pcp. The increase was primarily attributable to higher gross profit, lower general & administration expense, partially offset by increased sales & marketing expense and increased research & development expense. The Company reported a net profit of CAD 0.83 million, as compared to a loss of CAD 1.43 million in the previous corresponding period. The Group exited the quarter with total assets of CAD 95.65 million and cash & cash equivalents of CAD 11.95 million.

FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative): EV/ Sales Based Relative Valuation

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

Stock Recommendation: The stock of TCS stood resilient amid the broader market correction due to the COVID 19 pandemic. Notably, the stock is quoting above its 200-day simple moving average (SMA) of CAD17.44. Tecsys is a global service provider of transformative supply chain solutions which provides services to organizations with industry-leading tools to accomplish operational efficiencies. Growing demand for cloud-based products and related services are the major growth drivers for the company. With the increasing demand for data security and minimum pen and paperwork, organizations lean towards these information technology companies which would provide customized software required to cater the growing operations. We have valued the stock using EV/Sales based relative valuation method. The stock is currently trading at forward EV/Sales multiple of 2.5x. We expect the multiple to expand going forward on account of the abovementioned facts and arrived at a target price offering a double-digit upside potential (in percentage terms). Hence, we recommend a ‘Speculative Buy’ on TCS stock at the closing price of CAD 20.90 as on May 05, 2020.

TCS Daily Price Chart (Source: Thomson Reuters)

Knight Therapeutics Inc.

Product Re-launch to Support Business Growth: Knight Therapeutics Inc. (TSX: GUD) is a specialty pharmaceutical company focused on acquiring or in-licensing and marketing of innovative pharmaceutical products across Canada and Latin America. The Group owns a controlling stake in Grupo Biotoscana, a pan-Latin American specialty pharmaceutical company. 

the company announced that it is re-launching the Trelstar in Canada.  Also, the company will announce its first-quarter results on June 26, 2020. Also,

Q4FY19 Financial Highlight: GUD declared its quarterly results, wherein the Group reported a surge in revenue of CAD 37.27 million, as compared to CAD 3.88 million in pcp. The increase was primarily attributable to the increased revenue from the GBT segment on account of the timing of sales certain product like Impavido, Movantik sales and launch of Probuphine shipments. Adjusted operating income stood higher at CAD 11.65 million, as compared to CAD 5.61 million in Q4FY18. The Company reported an increase in selling and marketing, general and administrative, research and development and amortization costs during the quarter, as compared to the previous corresponding quarter. Net loss stood at CAD 3.153 million, as compared to CAD 0.221 million in pcp, due to a net loss from Knight segment. The Company exited the quarter with total assets of CAD 1,305.30 million and cash, cash equivalents of CAD 174.26 million.

Q4FY19 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The Stock GUD has generated positive returns ~5% and ~7% in the last nine months and one year, respectively, amidst the major shock across the broader market due to COVID 19 pandemic. The Company manufactures drugs used for the treatment of several critical diseases.  We believe the Company is well placed to capture the opportunities arising from the sector. During the last one month, the stock moved ~24%, outperforming the sector by ~8%. We are optimistic about the Company’s GBT segment and expect improved business prospects from the segment would contribute to the top-line of the Company. Hence, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 7.84, up 2.35% as on April 05, 2020.

GUD One-Year Daily Price Chart (Source: Thomson Reuters)

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