Aleafia Health (TSX: AH) is a vertically integrated and federally licensed Canadian cannabis company which offers cannabis health and wellness services and products in Canada. 

Why Should Investors Book Profit?

• Weak operating metrics: The company reported a negative EBITDA margin and negative net margin of 337.8% and 397.8%, respectively in Q3FY21, as compared to the industry median of 14.7% and 4.9%, respectively. This indicates poor operational performance, and the continuation of the above trend would dampen the company’s overall performance in the coming quarters.

• Significantly lower cash balance: At the end of Q3FY21, the group reported Cash and cash equivalents of CAD 4.688 million, as compared to CAD 30.529 million in Q4FY20. The decline remains a major concern and would impact the company’s overall liquidity position. Additional to this, AH posted a higher cash used in operating activities of CAD 29.541 million in 9MFY21, as compared to cash used of CAD 1.408 million in pcp.

• Lower traction from Bulk Wholesale Cannabis segment: In Q3FY21, the company reported lower Net cannabis revenue of CAD 1.945 million, which is lower than CAD 3.100 million in Q2FY21 and CAD 2.101 million in Q3FY20, respectively, primarily due to lower average net selling price per gram of bulk wholesale cannabis on account of lower demand dynamics.
  

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

The group reported an Adjusted EBITDA loss of CAD 16.778 million in 9MFY21, as compared to a profit of CAD 4.610 million in pcp, which remains as a key concern for the company.  We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a double-digit downside potential (in % terms). For the said purpose, we have considered peers like Auxly Cannabis Group Inc, IMAC Holdings Inc etc. Hence, considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock at the closing price of CAD 0.125 on January 13, 2022.

One-Year Technical Price Chart (as on January 13, 2022). Analysis by Kalkine Group

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

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