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 Highlights:

• Improved Macros and successful promotional strategy: The Cannabis segment has reported an upthrust in the recent past due to the gaining popularity of the hemp-based products within the medical and wellness industry coupled with prudent promotional strategies. Moreover, strong momentum from the eCommerce sales is also an encouraging sign for the company. The sector witnessed a surge in the retail stores due to increase penetration and gaining popularity across the consumers. Moreover, the sector offers enough room for growth, and we believe the company is highly poised to utilize the growing demand arising from the segment. 

• Collaboration with U.S. Women's and Olympic Soccer Star Carli Lloyd: On May 05, 2021, the company reported its collaboration with Carli Lloyd, a gold medal–winning Olympian. This is a promotional strategy of the company, wherein the company would propagate topical CBD products used for pain management.

Q1Y21 Financial Highlights:

• CWEB announced its quarterly results wherein the group posted revenue of USD 23.407 million, improved from USD 21.463 million in the previous corresponding period (pcp). The increase was aided by 14.5% y-o-y growth from the direct-to-consumer revenue to USD 16.130 million, partially offset by a 1.4% y-o-y slide in Business-to-business revenue to USD 7.277 million.
• Gross profit stood at USD 13.678 million, declined from USD 15.079 million in Q1 FY21 primarily due to a significant increase in the cost of sales (USD 9.770 million against USD 6.466 million in pcp).
• The group reported slightly higher operating expense at USD 23.996 million, as compared to USD 23.329 million in pcp. The increase was due to higher sales and marketing expenses (USD 7.720 million v/s USD 6.532 million in Q1FY20) coupled with higher research and development expense (USD 1.308 million v/s USD 0.766 million in Q1FY20). Meanwhile, a decline in General and administrative expense (USD 14.968 million v/s USD 16.031 million in Q1FY20) partially supported the performance.
• CWEB reported an operating loss of USD 10.318 million, higher than a loss of USD 8.250 million in Q1FY20.
• The group reported a cash balance of USD 35.048 million, while total assets were recorded at USD 295.577 million.

Source: Company

Risks: The products are relatively new to the market, and a change in consumer preference would impact the overall demand dynamics. The company reported higher input costs and marketing expense, and the continuation of the above trend is likely to take a toll on the company’s profitability.

Valuation Methodology (Illustrative): EV to Sales based

(Note: All forecasted figures and peers have been taken from REFINITIV).

Stock Recommendation:

The company holds a leading position in one of the fastest-growing industry, and the upcoming growth is expected from the positive industry tailwinds and growing acceptability of the cannabis products. Despite the current downturn, the company delivered improved revenue in the current quarter, which is a key positive and illustrates improved demand for the company’s products. Adjusted EBITDA loss declined to USD 4.658 million from a loss of USD 5.688 million in pcp, which is encouraging. 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 upside side potential (in % terms). For the said purpose, we have considered peers like Trulieve Cannabis Corp, Cresco Labs Inc etc. Based on technical analysis, the stock has support at CAD 3.8 level. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 4.71 on May 25, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

1-Year Price Chart (as on May 25, 2021). Analysis by Kalkine Group.

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

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 Updates:

• Proprietary production platform: The company has in-house production platform, which has ample organic compliance and batch tracking system. The group offers the cultivation through the proprietary grow areas called Grow Pods, which provides consistent high yields and quality throughout the year. Moreover, the company has invested in the automation of key processes, which has resulted in costs efficiencies. Additionally, production in small modular areas eliminates the risk of contamination and disease and compartmentalizes the risk of crop loss. 

• Encouraging outlook: In the recent past, the cannabis sector in Canada witnessed tremendous growth, supported by increased retail demand supported by higher retail presence. The company has a plan to expand its retail network in order to increase the market share through higher sales volumes. Currently, the company is operating through twelve retail stores and would add another eight stores by the end of FY21, which is a key positive. Moreover, to enhance its sales, the group is focusing on long-term client relationships across several emerging markets and in the United States, which looks promising.

Q1FY21 Financial Highlights:

• DN announced its quarterly result, wherein the company posted revenue of CAD 13.227 million, significantly higher than CAD 11.753 million in the previous corresponding period (pcp). The growth was driven by strong traction from the Retail (CAD 9.304 million v/s CAD 5.854 million in pcp) and Wholesale Cannabis (CAD 4.317 million v/s CAD 2.991 million in pcp) segments.
• Gross profit stood significantly lower at CAD 2.951 million as compared to CAD 7.656 million in pcp. The decline was primarily attributed to a significant surge in the cost of sales (CAD 9.539 million v/s CAD 6.858 million in pcp).
• Net loss from operations was recorded at CAD 3.999 million, v/s a gain of CAD 2.189 million in Q1 FY20. The quarter was marked by higher general and administrative expense (CAD 3.517 million v/s CAD 3.198 million in pcp) and increase in sales and marketing expense (CAD 2.176 million v/s CAD 1.243 million in pcp).
• The group reported a cash balance of CAD 4.583 million, while total assets stood at CAD 74.975 million.

Income Statement Highlights (Data Source: Company)

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

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation:

The company offers turnkey cultivation systems and equipment and provides licensing and consulting services to new and pre-licensed manufacturers. Moreover, with the growing acceptability of cannabis products, like Oils, Extracts & Derivative Products, along with several high-quality dried cannabis items, the company is highly poised to deliver improved prospects in the coming years. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Paratek Pharmaceuticals Inc, Aytu Biopharma Inc. Based on technical analysis, the stock has support at CAD 0.41 level. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating in the stock of DN at the closing price of CAD 0.51 on May 25, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Price Chart (as on May 25, 2021). 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.