Aleafia Health

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.

Key Highlights:

• Constant reduction in debt: During the recent quarters, the company reported a continuous decline in its total borrowings, which is a key positive. The above indicates prudent capital management and enhance the overall financial flexibility of the firm.
  

• Strong demand within adult-use segment:  On a sequential basis, the company reported a stellar growth from its adult-use segment during Q3FY21, supported by robust demand dynamics from its everyday cannabis brand Divvy coupled with several new launches of several medical products such as Black Widow CBD 14g Dried Flower and FLO 14g Dried Flower. The above products reported solid responses from the consumers, which has resulted in a ~93% q-o-q increase in revenue from the above segment.
• Product expansion to cater to rising demand: During Q2FY21, the company focused on product expansion within its cannabis brand and product portfolio, which includes favorable formats and new SKUs in the important value flower and pre-roll segments. The roll-out included the launch of an additional thirteen new product SKUs, the health and wellness brand Noon & Night, and the adult-use value brand Divvy. This would allow the customers to choose from its wider variety of offerings and would subsequently boost volumes.

Q2FY21 Financial Highlights:

• AH announced its quarterly results, wherein the company posted revenue of CAD 10.672 million, which climbed from CAD 9.775 million in the previous corresponding period (pcp). The growth was aided by strong demand from the Medical Cannabis and Adult-use Cannabis segments, partially offset by lower income from the Bulk Wholesale Cannabis segment.
• Gross profit soared to CAD 8.120 million, from CAD 2.4 million in pcp, thanks to the elevated revenue coupled with lower inventory expenses.
• The quarter was marked by higher general & administrative costs, a rise in wages & benefits expenses, a significant surge in bad debt expense, partially offset by a decline in the business transaction costs.
• The company reported a lower net loss of CAD 0.036 million, as compared to a net loss of CAD 4.020 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risk: The products are comparatively new to the consumers, and hence a change in the consumer taste and preferences might dampen the company’s overall sales volumes. Moreover, a continuation of the higher input costs would likely to dampen the company’s profitability.

Stock Recommendation:

In Q2FY21, the company reported a sale of 7,811 kg of its medical product, reflecting an exponential growth of 207% on Y-O-Y and 148% on Q-O-Q basis, supported by significant increases in the sale of cannabis within the adult-use, medical and bulk wholesale sales channels. Recent launches along with favorable offerings are likely to support the company’s upcoming sales. On the valuation front, the stock is available at an EV to Sales multiples of 1.6x on an NTM basis, as compared to the industry (Healthcare) median of 6.1x. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 0.275 on October 20, 2021 with a double digit (in % terms) upside potential.

Technical Analysis Summary

One-Year Technical Price Chart (as on October 20, 2021). Source: REFINITIV, Analysis by Kalkine Group

Delta 9 Cannabis Inc.

Delta 9 Cannabis Inc. (TSX: DN) is a Canada-based company that operates in Biotechnology and Medical Research. The group is a licensed producer of medical marijuana and operates a production facility in Winnipeg, Manitoba.

Key Highlights:

• Expanding store presence: The company operates with sixteen retail stores and is planning to add four new stores in FY21, which support the company to cater to a larger audience across the country. Moreover, the company’s stores are strategically located across the high-traffic areas, beside addressable partner’s stores such as liquor, grocery, pharmacy, and fastfood. Moreover, the company has brand partnerships with the industry’s leading suppliers, which are also likely to boost the company’s wholesale segment in the coming days.
• Elevated production: The company caters to both the retail and wholesale segments and reported an elevated production in the recent few quarters. Additionally, the cannabis-based products have gained improved traction in the recent past and are expected to retain the grow in the coming days. In Q2FY21, the group reported the highest production during the last five quarters, which is noteworthy.

• Decline in borrowings: The company reported a decline in its total borrowings at CAD 9.454 million in Q2FY21, which was lower than CAD 10.711 million in Q4FY20. The above indicates prudent capital management as the management is focusing on lowering its total debt in order to gain higher financial flexibility and lower interest costs.

Q2FY21 Financial Highlights:

• DN announced its quarterly result, wherein the company posted its revenue of CAD 16.750 million, climbed from CAD 13.013 million in the previous corresponding period (pcp). The growth was driven by strong traction from the Wholesale Cannabis segment (CAD 5.594 million v/s CAD 1.438 million in pcp) and decent performance from the Wholesale Cannabis segment (CAD 10.037 million v/s CAD 8.203 million in pcp) segments.
• Gross profit slide to CAD 4.890 million, from CAD 5.180 million in pcp. The decline was primarily attributed to a significant surge in the cost of sales (CAD 11.817 million v/s CAD 9.063 million in pcp).
• The quarter was marked by lower general & administrative costs, partially offset by higher sales & marketing expenses and share-based compensation expenses.
• The group reported a net loss of CAD 1.138 million, as compared to the net loss of CAD 0.455 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risk: The products require constant innovation, as the industry is in the early stages of development, hence entry of new products might reduce the company’s market share. Moreover, cancellation or delay in regulatory approvals would dampen the company’s strategy, which is a prime concern.

Stock Recommendation:

The company has a low conversion and installation costs and can expand for less than CAD 100/square foot making incremental expansion very economical. This is impressive as it would result in lower capital expenditure. Additionally, the company invested in the automation of its key processes, which has resulted to lower production costs as well. On the valuation front, the stock is available at an EV to Sales multiples of 0.9x on an NTM basis, as compared to the industry median of 3.4x. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 0.40 on October 20, 2021 with lower double digit (in % terms) upside potential. 

Technical Analysis Summary

One-Year Technical Price Chart (as on October 20, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.