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.

Key highlights

• Expanding product offerings: The company has announced the availability of new Charlotte's Web TCH-Free 25 mg CBD Oil Tinctures in 10 and 30 milliliter quantities. The Company is extending its product options for consumers seeking a THC-Free alternative as the CBD industry pioneer of full spectrum hemp CBD wellness 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.

Source: Company

• Increasing Ecommerce capabilities: In Q1 2021, direct-to-consumer (DTC) eCommerce revenues increased by 14.5%, accounting for 68.9% of overall revenue compared to 65.6 % in the previous comparable period, offsetting a 1.4% 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.

Financial overview (In thousands of United States dollars)

Source: Company

• In Q1 2021, the company posted higher revenue of USD 23.4 million against USD 21.4 million in Q1 2020. An increase of 9.1% in the revenue was due to competitive pricing resulting in increased unit sales.
• On the account of higher cost of sales, which increased 51.1% to USD 9.7 million, the group’s gross profit fell to USD 13.6 million, against USD 15.0 million in pcp.
• The company’s operating loss increased in the reported period to USD 10.3 million, against a loss of USD 8.2 million in the previous corresponding period, primarily due to higher cost of sales in the reported period.
• Net loss increased to USD 13.9 million, against USD 11.4 million in pcp. The rise in loss was mainly due to lower gross profit and loss due to change in fair value of warrants and other expense.
  

Risks associated with investment

The company’s 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/SALES

Stock recommendation

The “DTC” sales continued to rise, indicating the e-commerce channel's long-term secular resilience. Despite lower retail activity because of the pandemic, the company's directly comparable B2B retail sales performance cannot be characterized as bad in Q1 2021. The group is enhancing its brand presence through major 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 domestic markets.  Internationally, the group has moved into Israel with initial product sales planned for early 2022. Furthermore, it expanded its number one market share position across major retail channels including total food/drug/mass retail and US natural specialty retail and believes it is well positioned to drive continued growth in the US and new growth in key international markets as we expand outside of the US. Based on technical analysis, the stock has support at CAD 3.85 level. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 4.74 on June 23, 2021. We have considered Cresco Labs Inc, Aurora Cannabis Inc, Green Thumb Industries Inc, etc. as the peer group for the comparison.

*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 June 23, 2021). Source: Analysis by Kalkine Group

Ceapro Inc

Ceapro Inc (TSXV: CZO) is engaged in the development and application of proprietary extraction technology to produce extracts and active ingredients from oats and other renewable plant sources. Its operating segments are the Active ingredient product technology industry and the Cosmeceutical industry.

Key highlights 

• Positive outlook for cosmeceutical base business: We expect the company’s cosmeceuticals-based business to continue to grow and provide positive cash flows to support the expansion to a new business model. It is repositioning itself from a contract manufacturer/commodity company to a high-value life science/biopharmaceutical company involved in nutraceuticals and pharmaceuticals. Moreover, it has all the key components for success, including a solid foundation, a highly competent team, a healthy balance sheet, and a strong technology and product portfolio with the potential of getting into very large markets.

• Value driving products: The company has established base business with multiple growth opportunities and leveraging two value-driving products and enabling technologies, which supports near-term and future growth.             

Source: Company 

   Financial overview of Q1 2021

   Source: Company

• Total revenue in Q1 2021, increased by 10% to CAD 4.7 million compared to CAD 4.3 million in the previous corresponding period. The increase was primarily driven by higher beta glucan sales, partially offset by a lower U.S. dollar relative to the Canadian dollar.
• Gross margin dropped to CAD 2.2 million in the reported period against CAD 2.3 million, mainly due to higher cost of goods sold, which stood at 52% v/s 44% in pcp.
• Income from operations stood at CAD 0.62 million against CAD 0.85 million in Q1 2021, primarily due to increased R&D expense.
• Net income in Q1 2021, reported by the company stood at 0.51 million against CAD 1.1 million in pcp.

 Risks associated with investment 

The company is exposed to a varied range of risks ranging from regulatory risks, uncertainty in product development and related clinical trials and validation studies. Further, the company is exposed to forex risks, and investor are exposed to liquidity risk given the penny-cap market categorization of the company. 

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

The company has a business model with a highly competent team, a healthy balance sheet, and a strong technology and product portfolio with the potential of getting into very large markets. Further looking at the recent quarter upsurge in the R&D expenses, we believe the product portfolio is likely to bolster in the near term as higher R&D cost shows that the company is diligently working on new product development and enhancement of the efficacy of the existing product portfolio. Therefore, margin decline in the first quarter of 2021 looks temporary, and with the adoption of new technology and products, we see the financial position to further improve in the near future. Based on technical analysis, the stock has support at CAD 0.58 level. On the valuation front, the stock is trading at an EV/SALES multiple of 2.75x on an NTM basis as compared to the peer’s median of 3.72x. Therefore, based on the rationale discussed above and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 0.70 on June 23, 2021. We have considered Esperion Therapeutics Inc, GCP Applied Technologies Inc, Novozymes, etc. as the peer group for the comparison.

*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 Technical Price Chart (as on June 23, 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.