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:

• Collaboration with InterCure Ltd: Recently, the company made a distribution agreement with InterCure Ltd, one of Israel's largest and established medical cannabis producer. As per the Management, the above collaboration would help the company with deep knowledge and innovation, which is a key positive for better product offerings. Moreover, products of the company would be supplied to the Israeli consumers, which augurs well for added sales volumes.
• Acquisition: The company acquired CBD CLINIC, CBDMEDIC, and Harmony Hemp brands, which has enhanced the company’s product line and has given additional customer-base.

Q3FY20 Financial Highlights:

• CWEB declared its third-quarter results, wherein the company posted revenue of USD 25.156 million, as compared to USD 25.045 million in the previous corresponding period (pcp).
• Gross profit came lower at USD 14.757 million, as compared to USD 17.881 million in Q3FY19. The decline was primarily due to a significant increase in the cost of sales (USD 9.898 million versus USD 7.181 million in pcp).
• CWEB reported an operating loss of USD 13.55 million, considerably higher from USD 1.719 million in Q3FY19. The decline was majorly attributable to a higher general and administrative expense and sales and marketing expenses. Moreover, a rise in the research and development expense (USD 1.984 million versus USD 0.255 million in Q3FY19) also pushed the operating expense.
• The group reported a cash balance of USD 65.891 million, while total assets were recorded at USD 330.46 million.

Q3FY20 Income Statement Highlights (Source: Company Presentations)

Risks: The company is exposed to a variety of risks ranging from regulatory risks, forex risks, and an increase in cost of sales. 

Valuation Methodology (Illustrative): EV to Sales Based

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

Stock Recommendation:

During the third quarter, DTC e-commerce sales grew by 27.5% on y-o-y basis primarily due to increased marketing and targeted promotions, which is a key positive. The recent distribution agreement InterCure Ltd. would enhance its geographical presence and would contribute to future sales growth. We believe, with the increasing traction across the healthcare segment, the group is likely to report a higher sales volume in the foreseeable future. We have valued the stock using EV to Sales based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered industry median (Pharmaceuticals) on NTM basis. Hence, considering the above factors, stock price movement, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 4.68 on December 29, 2020.

1-Year Price Chart (as on December 29, 2020). Source: Refinitiv, Thomson Reuters

The Valens Company Inc.

The Valens Company Inc. (TSX: VLNS) is a developer and manufacturer of cannabinoid-based products. The company's extraction methods are CO2, ethanol, hydrocarbon, solvent-less, and terpene extraction. Its products are tinctures, capsules, beverages, and vape cartridges, among others.

Key Highlights:

• Awarded Export-Import License in Asia Pacific and Australia: The company reported that it had been awarded licenses to import and export cannabis-derived medical products. The above license allows the company to import and export its products across Australia and Asia-Pacific regions, which is a key positive.
• Growing Cannabis demand: The cannabis market within Canada is expected to grow from current CAD 2.9 Billion to CAD 5.4 Billion in FY22, and hence provides ample growth potential for cannabis manufacturers. As per the recent statistics, 66% of the non-users of the cannabis-based products have shown interest in ingestible cannabis. Hence, we believe, cannabis usage is likely to accelerate in the foreseeable future. Moreover, we expect that the cannabis market size would be supported by higher demand for products like vapes, concentrates, and edibles.

Source: Company Presentations

• Impressive FY21 Outlook: VLNS is the largest third-party manufacturer of cannabis derivatives across Canada and has 425,000 kg of cannabis processing capacity. In FY21, the company would launch new derivative products, including edibles and topicals and new specialty products including hash and pre-rolls. Looking at the current scenario, the above products would likely to support the company’s future growth. Moreover, the management of VLNS has cited that it would mark its expansion across new domestic and international markets.

Q3FY20 Financial Highlights:

• VLNS declared its quarterly results, wherein the group reported revenue of CAD 18.517 million, higher than CAD 16.461 million in Q3FY19. The increase was driven by higher traction from the company’s white label cannabis 2.0 product supported by higher frequency and size of purchase orders from the provinces and the sale of bulk winterized and distillate oil, partially offset by lower shipments of biomass from extraction partners on account of COVID-19 pandemic.
• Despite the impressive top-line growth, the company posted a loss from operations at CAD 3.362 million, against a profit of CAD 5.523 million in Q3FY19. The decline was primarily attributed to an increase in depreciation and amortization costs (CAD 2.588 million versus CAD 0.609 million in Q3FY19), higher wages and salaries (CAD 2.428 million versus CAD 0.797 million in pcp) and general administrative (CAD 0.697 million versus CAD 0.116 million in Q3FY19), and significantly higher professional fees (CAD 0.888 million versus CAD 0.332 million in pcp).
• The Group reported a net loss of CAD 3.064 million, as compared to a net profit of CAD 5.893 million in pcp.
• VLNS exited the quarter with a cash balance of CAD 30.257 million, while total assets were reported at CAD 193.857 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Decline in the profitability remains a concern for the company, while the future demand would largely depend upon the consumer preferences and the company’s strategy to enter in new Geographies. Hence, a change in the product acceptability, coupled with unfavorable marketing strategies, may hamper the company’s future prospects.

Stock Recommendation:

The Company reported the completion of its first successful shipment to Denmark for a research and development initiative. The stock of VLNS corrected ~27% and ~47% in the last six months and one year, respectively and currently trading at the lower band of its 52-weeks trading range of CAD 4.10 and CAD 1.44. The company reported a poor bottom-line and most of the negatives had been priced in with the recent correction. On the other side, with the expansion across the new geographies, VLNS is likely to accelerate its top-line in the foreseeable future. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ on the stock at the closing price of CAD 1.70 on December 29, 2020.

1-Year Daily Price Chart. Source: Refinitiv (Thomson Reuters)

Disclaimer

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