Charlotte's Web Holdings Inc.

Charlotte's Web Holdings Inc. (TSX: CWEB) is engaged in the production and distribution of hemp-based cannabidiol (CBD) wellness products. Its product categories include tinctures (liquid product), capsules and topical products.

Major Highlights:

• The Company confirmed U.S. utility patent U.S. 10,653,085 for CW1AS1, a new hemp variety created by CBD's co-founder Joel Stanley and Sr. Director of Cultivation R&D Bear Reel.

• The Company is entered into an agreement to acquire Abacus Health Products. Abacus is a leading provider of topical products for pain relief and skincare containing CBD hemp extracts. The transaction is expected to be closed in late Q2 or early Q3 of FY20.

Q1FY20 Financial Highlights: CWEB reported its quarterly results, wherein the Company posted revenue of USD 21.5 million, as compared to USD 21.7 million in pcp. The period was marked by strong DTC e-commerce sales enabled by the new technology platform and capabilities. DTC e-commerce sales contributed to 65.6% of total revenue compared to 50.2% in the previous corresponding quarter. Gross profit came slightly lower at USD 15.1 million, as compared to USD 15.9 million in pcp, due to a marginal decline in revenue. Operating expenses rose to USD 23.3 million, from USD 13.2 million in pcp on account of investments in capacity expansion and the Group's transition to a consumer-packaged-goods company. The Group reported a net loss of USD 11.5 million, as compared to a net profit of USD 2.3 million in the previous corresponding period. The Company exited the quarter with cash and cash equivalent of USD 53 million, while total assets stood at USD 190.2 million.

Q1FY20 Income Statement Snapshot (Source: Company Reports)

Valuation Methodology (Illustrative): EV/Sales based valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock corrected ~61% in last one year, and currently trading at the lower band of its 52-weeks trading range of CAD 30.11 and CAD 4.08. Patents on hemp genetics are new to the industry, and only selective products were approved, and the company has the upper hand in this segment. Further, the company would invest in the breeding program and in the research of hemp in order to offer superior quality of hemp to the customers. The Cannabis segment is new to the industry while its potential is still unknown to the broader market. Thus, the discovery of new products would drive the demand for hemp-based products on a larger scale. Currently, the company is shipping product through more than 11,000 national retailer store locations, and the company is likely to enhance its product-presence in order to cater to a larger audience in the coming days. During the month of April 2020, the company launched seven new topical products and received excellent customer feedback. Meanwhile, the group expect online sales to grow faster than the retail segment during the first half of the FY20 and drive the company’s top line. The group is also exploring the pet market as well, which seems to have a high potential. The CBD pet market is forecast to grow rapidly at a Compound Annual Growth Rate of 151% between 2018-2022. Currently, the group generates ~8% of its revenue from Pet products. The stock made a bounce back and reported a ~14% growth in the last one month and is trading above its 20-days and 50-days SMA of CAD 6.88 and CAD 6.26, respectively, which indicates a short-term bullish pattern. We have valued the stock using EV/Sales based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Canopy Growth Corp (TSX: WEED), Aurora Cannabis Inc (TSX: ACB) and Cronos Group (TSX: CRON) etc., to name a few as a peer group. Hence, we recommend a ‘Speculative Buy’ on the stock at the current closing price of CAD 7.51 on May 29, 2020.

CWEB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Organigram Holdings Inc.

Organigram Holdings Inc. (TSX: OGI) is a Canada based licensed producer of cannabis products. Organigram focuses on producing exceptional, indoor-grown cannabis for patients and adult recreational consumers.

Recent Highlights:

• The Company reported an available undrawn capacity of CAD 30 million of term loan and CAD 25 million of revolving credit facility.

• The Company has expanded its medical cannabis offering and included products from its cannabis 2.0 adult-use recreational portfolio. The products are available in a ready to use format, which is expected to drive its sales volume in coming days.

Q2FY20 Financial Highlights: OGI declared its quarterly results, wherein the Company reported a lower net revenue of CAD 23.22 million, as compared to CAD 26.93 million in pcp. Gross margin before fair value adjustments declined drastically to CAD 7.41 million against CAD 16.04 million, due to a considerable increase in the cost of sales coupled with lower revenue. Gross margin grew to CAD 11.28 million from CAD 7.96 million in pcp due to a gain from fair value changes to biological assets and changes in inventory sold. Total operating expenses increased to CAD 15.31 million from CAD 9.72 million in pcp, due to a sharp rise in General & administrative expense. Net loss from continuing operations stood at CAD 6.83 million, as compared to a loss of CAD 6.38 million in Q1FY19.

Q1FY20 Income Statement Highlights (Source: Company Reports)

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

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of OGI tanked ~76% in the last one year and currently trading near to its 52-week low. OGI strategically acquired and developing land and buildings adjacent to the main facility, which is expected to result in a differentiated cultivation and production facility. Within its cultivation rooms at the Moncton Campus, the company grows on three levels, which helps the company to achieve a higher production capacity, when compared to the other cultivation facilities. Apart from the retail presence, the products are available through a courier facility, which augers well for the current lockdown scenario, as the customers stay away from the retail stores. The construction of Phases 4A and 4B has been completed, and licensing approval from Health Canada received for total target licensed cultivation capacity of 89,000 kg per year. The group also gets approval from Health Canada for Phase 5 expansion which includes a dedicated edibles and derivatives facility. The stock is trading above its 20-days and 50-days SMA of CAD 2.14 and CAD 2.29, respectively, which indicates a short-term bullish pattern. We have valued the stock using Price to Book multiple based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Hexo Corp (TSX: HEXO), Aurora Cannabis Inc (TSX: ACB) and Cronos Group (TSX: CRON) etc., to name a few as a peer group. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 2.42 on May 29, 2020.

OGI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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