Cronos Group

Cronos Group (TSX: CRON), headquartered in Toronto, Canada cultivates and sells medicinal and recreational cannabis through its medicinal brand, Peace Naturals, and its two recreational brands, Cove and Spinach. Although it primarily operates in Canada, Cronos exports medical cannabis to Poland and Germany.

Key highlights 

• Accelerating commercialization of cultured cannabinoids: Ginkgo Bioworks, Inc. (“Ginkgo”) and the company recently announced a revised cooperation and licensing agreement that would allow the companies to commercialize cultured cannabinoids at scale faster. Cronos Group would be able to launch products containing cultivated cannabinoids sooner than expected thanks to the Amended Agreement with Ginkgo. Furthermore, CBG's final productivity objective is expected to be met by September 2021, according to the firm.
• Making strategic investment in PharmaCann Inc.: The company recently purchased a 10.5% ownership share in PharmaCann for a total price of USD 110.4 million. PharmaCann has a broad geographic footprint in the United States and has built an efficient, effective, and scalable operating model, including six production facilities and 23 dispensaries operating under the Verilife brand across six limited license states, so we believe this investment would benefit the company from rapid growth in the U.S. cannabis market.

Financial overview of Q1 2021 (in thousands of USD)

Source: Company 

• In Q1 2021, the company reported higher revenue at USD 12.6 million, compared to USD 8.4 million in the previous corresponding period. The increase in revenue was primarily driven by continued growth in the adult-use Canadian cannabis market, sales in the Israeli medical cannabis market, and increased sales in the U.S. segment driven by new U.S. hemp-derived CBD products introductions.
• The company reported a gross loss of USD 2.9 million in Q1 2021, decreased by USD 3.5 million from USD 6.4 million in Q1 2020. The minimized gross loss was primarily driven by an increase in net revenue and decreased inventory write-downs in the Rest of the World segment.
• Total operating expenses increased to USD 40.4 million against USD 38.5 million, while operating loss stood at USD 43.4 million V/s USD 45.0 million in pcp.
• On the back of loss on revaluation of derivative liabilities, which stood at USD 116.8 million, the company posted a net loss of USD 161.6 million against a profit of USD 75.6 million in the previous corresponding period.

Risks associated with investment

Any change in rules or government policies might have an impact on the Company's overall operations. In addition, the firm engages in derivative transactions and foreign currency exchange rates which adds another layer of risk.

Stock recommendation

In the first quarter of 2021, the company’s results were impacted by market dynamics due to the COVID-19 pandemic and ensuing stay-at-home orders and various other restrictions. With an amended collaboration and license agreement with Ginkgo Bioworks, Inc., the company is looking to accelerate the commercialization of cultured cannabinoids at scale. It would also enable the group to commercialize products using cultured cannabinoids. Additionally, the company made a strategic investment in PharmaCann Inc., through which the company would benefit from rapid growth in the U.S. cannabis market. On the valuation front, the stock is available at an EV to Sales multiple of 20.9x on an NTM basis, compared to the industry (Healthcare) median of 6.9x. Hence, considering the above rationale and stretched valuations, we recommend a ‘Watch’ rating on the stock at the closing price of CAD 10.60 on June 17, 2021.

One-Year Technical Price Chart (as on June 17, 2021). Analysis by Kalkine Group

HEXO Corp

HEXO Corp (TSX: HEXO) is an award-winning consumer packaged goods cannabis company that creates and distributes innovative products to serve the global cannabis market. The Company serves the Canadian adult-use markets under its HEXO Cannabis, Up Cannabis and Original Stash brands, and the medical market under HEXO medical cannabis.

Key highlights 

• Aims to become a top-three cannabis player: At the time of legalization, the firm outlined a strategy to become one of the top three cannabis companies in Canada's adult-use market. With the purchase of Zenabis and the statements of intent to buy 48North and Redecan, the business is on the track of achieving its goal of being the number one licensed producer in terms of recreational market share. The company aims to grow its market share by utilizing the top activities of each business to generate synergistic value through the acquisition and merger of these companies.
  

• Making an entry into the US market: The firm entered the United States by utilizing Molson Coors' infrastructure in Colorado to manufacture and distribute CBD beverages. The company anticipates that the legal landscape in the United States would evolve to allow national distribution. Its advanced knowledge of cannabis technology, combined with the strength of consumer insights and distribution networks of current and future anticipated partners, would provide significant operating leverage.

• Boosting liquidity through Senior Secured Convertible Notes: The Company recently completed an offering of USD 360 million in aggregate principal amount of senior secured convertible notes, expiring on May 1, 2023, to an institutional purchaser and some of its affiliates or linked entities. The Company plans to use the net funds from the Offering to finance the acquisitions in full.
  

Financial overview of Q3 2021 (expressed in thousands of CAD)

Source: Company 

• In Q3 2021, the company posted muted growth in net revenue at CAD 22.6 million compared to CAD 22.1million in the previous corresponding period.
• Despite the higher cost of goods sold, the company reported growth in its gross profit to CAD 8.8 million in Q3 2021, against CAD 5.7 million in the previous corresponding period. Thanks to an unrealized gain on changes in the fair value of biological assets.
• On the back of lower operating expenses, the company reported lower operating loss of CAD 16.0 million against CAD 21.0 million in pcp.
• Net loss in Q3 2021 stood at CAD 20.7 million compared to CAD 19.5 million in pcp.
  

Risks associated with investment

The Covid-19 pandemic could still result in the delay of contracts, and thus, it can impact the cash flows. Additionally, the unfavorable changes in foreign currencies and economic downturn can significantly impact profitability. 

Stock recommendation

Although the firm had a challenging quarter in Q3 2021, it retained its top spot in the beverage category. It expanded net sales outside of Quebec by 169% year over year, including 14% sequential quarterly growth in Ontario. Moving forward, the company plans to restructure its strain strategy and brand mix in Quebec to guarantee that it meets customer demand and maintain a dominant position in the province. The firm wants to be one of the top three cannabis companies and to do so it has been busy making acquisitions. The firm intends to grow its market share as a result of the acquisition and integration. Furthermore, the firm has entered the US market, which is noteworthy. However, the company has been reporting net losses since inception, which is a worry point. Moreover, on the valuation front, the stock is available at a forward EV/Sales multiple of 4.2x against an industry median of 4.0x reflects the stock price are a bit overstretched. Hence, considering the aforesaid rationale, we recommend a “Watch” rating on the stock at the closing price of CAD 7.17 on June 17, 2021. 

One-Year Price Chart (as on June 17, 2021). Source: 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.