Charlotte’s Web Holdings Inc

Charlotte’s Web Holdings Inc (TSX: CWEB) is a Canada-based company engaged in producing and distributing hemp-based cannabidiol (CBD) wellness products. Its product categories include ingestible products (tinctures, capsules, and gummies), topicals, and pet products.

• Acquired Abacus Health Products Inc.: The firm recently purchased Abacus Health Products, Inc. for USD 114.1 million in order to become the industry leader in CBD topicals. This purchase, we expect, would scale the company's synergies across the channel, as well as segment penetration and supply chain control.

• Increasing eCommerce capabilities: In FY2020, direct-to-consumer (DTC) eCommerce revenues increased by 27.6%, accounting for 67.0% of overall revenue compared to 52.9 % in the previous comparable year, offsetting a 29.5% decrease in B2B sales. The competitive pricing realignment, new product offerings, and improved targeted promotions resulting in increased sessions, transactions, conversion rates, and unit volumes helped the company record this extraordinary performance from the eCommerce segment.

• Expanding in foreign territories: As the first step in its international growth plan, the organization recently signed a 5-year exclusive distribution agreement with Intercare/Canndoc in Israel. We believe it would improve business prospects for the company in the coming days. 

Financial overview of FY2020

Source: Company

• In FY2020, the company posted revenue of USD 95.2 million, against USD 94.5 million in FY2019. The slight increase in the revenue was due to competitive pricing resulting in increased unit sales.
• On the lower cost of sales, the group increased its gross profit to USD 52.2 million, against USD 50.6 million in pcp.
• The company’s operating loss in the reported period increased to USD 52.4 million, against a loss of USD 24.8 million, primarily due to higher operating expenses which stood at USD 104.7 million V/s USD 75.4 million. The operating costs increased primarily due to acquisitions made by the company.
• Net loss increased to USD 47.1 million, against USD 15.5 million in pcp. The rise in loss was mainly due to higher operating expenses, higher finance cost and income tax.

Risks associated with investment

The products are relatively new to the market, and a change in consumer preference may impact the overall demand dynamics. Moreover, due to the lengthy procedure of product-approval and product innovations, along with an increase in the higher input costs, the company might witness a subsequent fall in the profitability and margins.

Valuation Methodology (Illustrative): EV to Sales

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

Stock recommendation

The group is enhancing its brand presence through acquisitions of CBD CLINIC, CBDMEDIC, Harmony Hemp brands and Abacus Health Products Inc and witnessed improved traction from the consumers. The management is focusing on growing its brand presence across the international and as well as domestic markets. Furthermore, it Secured 3 U.S. Patents for proprietary hemp cultivars bringing total patents to 5 in 2021 and invested USD 28.3 million to expand capacity for production, extraction, R&D and distribution. We believe all these steps would improve the business prospects of the company in the coming days. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 5.06 as of April 19, 2021. We have considered Trulieve Cannabis Corp, Aurora Cannabis Inc etc., as the peer group for the comparison.

1-Year Price Chart (as on April 19, 2021). Source: Refinitiv (Thomson Reuters)

Delta 9 Cannabis Inc

Delta 9 Cannabis Inc (TSX: DN) is a Canada-based company engaged in Biotechnology & Medical Research. The principal activities of the Company are the production, storage and sale of medical marijuana.

Key highlights 

• Increasing retail stores: The organization is making steady strides against its target of opening 20 Delta 9 Cannabis specialty stores throughout the Prairie provinces this year. The group also announced the grand opening of its twelfth Delta 9 Cannabis specialty outlet, as well as the tenth cannabis store in Manitoba. 

• Launched new product: The company is collaborating with Decibel on a range of vaporized cannabis oil accessories, which would include vaporizable oil cartridges and disposable vape pens. It recently launched vape products in the recreational cannabis industry, and it expects that the domestic recreational cannabis market to offer a significant growth potential for the company in the coming years.

• Introduction of a new delivery service program: Recently, the company introduced the same day home delivery service program to meet growing consumer demand from the online segment across all retail markets. The management stated that same-day delivery programs across Manitoba and received positive traction resulting in strong online sales growth. We believe the momentum to sustain in the coming quarters supported by convenient delivery options offered by the group.

• Agreement with Fourth Generation Cannabis Ltd.: On March 04, 2021, the company announced that it had completed its final services milestone under an agreement with Alberta based Micro Cultivation partner, Fourth Generation Cannabis Ltd. As per the agreement, the group would provide services related to cannabis production, development of standard operating procedures and sanitation programs, consulting on Health Canada licensing, marketing services etc. 

Financial overview of FY 2020

Source: Company 

• In FY 2020, the Company registered a healthy growth of 64% in sales to CAD 52.04 million, against CAD 31.7 million in the previous corresponding period. The rise was due to solid performance in its retail, wholesale and B2B cannabis.
• Gross profit stood at CAD 17.9 million, against CAD 12.0 million in pcp. It witnessed a lower cost of sales as a % to revenue, which stood at 65.8% V/s 72.6% in pcp.
• The Company minimized its loss from operations in FY 2020 to CAD 2.7 million, against CAD 5.0 million in FY 2019.
• Net loss stood at CAD 5.4 million, against a profit of CAD 10.6 million in the previous corresponding period.  

Risks associated with investment

Several risk factors could impact the Company’s ability to execute its key strategies successfully and materially affect future events and financial performance. Some of these risks include reliance on licences and authorization, disruption in the supply chain, inability to sustain pricing and inventory models, etc. 

Valuation Methodology (Illustrative): EV to Sales 

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

Stock recommendation

The group would continue its expansion within the retail store chain and focus the Company’s price leader strategy to leverage customer acquisition at new and existing stores. Moreover, it focuses on building momentum in the cannabis wholesale segment through product expansion and enhancing its distribution across the markets. It recently released vape products in the recreational cannabis market. The company believes that the domestic market for recreational use cannabis would present a significant growth opportunity for the next several years. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 0.57 on April 19, 2021.

1-Year Price Chart (as on April 19, 2021). Source: Refinitiv (Thomson Reuters)

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.