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

• Accelerating national and international retail expansion: By focusing on client acquisition and retention, as well as speeding national and international retail growth, the Company hopes to capitalize on the rapidly growing CBD wellness products sector. In addition, it would be extending its product line beyond Industrial Hemp-based items, which is a key positive. Furthermore, it is also investing research and development to find new product prospects. The management is looking for ways to increase manufacturing capacity, sales and marketing infrastructure, and gain more control.

• 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.

• 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 on March 8, 2021. As the CBD industry pioneer of full spectrum hemp CBD wellness products, the Company is expanding its product offerings for consumers seeking         a THC-Free option.

• 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.

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 increased its operating loss in the reported period to USD 10.3 million, against a loss of USD 8.2 million, 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.

Stock recommendation

The “DTC” sales continued to rise, indicating the eCommerce channel's long-term secular resilience. Despite lower retail activity due to 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 as well as 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 and believes it is well positioned to drive continued growth in the US and in key international markets. On the valuation front, the stock trades at a lower EV to Sales multiple of 3.3x on an NTM basis, versus the industry (Pharmaceuticals) median of 3.5x. Hence, considering the aforesaid factors, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 4.18 on July 15, 2021.

One-Year Technical Price Chart (as on July 15, 2021). Source: REFINITIV, Analysis by Kalkine Group

Hamilton Thorne Ltd

Hamilton Thorne Ltd. (TSX: HTL.V) is engaged in developing, manufacturing, and selling precision laser devices and advanced image analysis systems for living cell applications in the fertility, stem cell, and developmental biology research markets. The Company offers Clinical lasers, Research lasers and Clinical Sperm Analysis Products.

Key highlights 

• Focused on enhancing margins: The Company sees the opportunity to increase margins over time by adding more branded products, expanding its direct sales into both new and existing markets, and over the long-term, by taking advantage of economies of scale as it grows.
  

• Increase in Cash from Operations: For Q1FY21, the company reported net cash flow from operations at USD 1.49 million, significantly improved from USD 0.70 million in Q1FY20. The improved performance was due to a result of higher market share through the offerings of new products and services and coupled with a recent acquisition.
  

• Rise in ART Services: Increased weight, environmental concerns, reproductive difficulties, and other reasons have all contributed to a shift in consumer choice toward the rising use of Assisted Reproductive Technologies (ART) services in recent years. Moreover, a rise of the emerging middle class in developing countries coupled with a surge in insurance & reimbursements programs and adaptation of several technologies has supported the higher demand for ART services. We believe the demand for the above clinical services is likely to remain elevated in the coming days.
  

• Acquired Tek-Event Pty. Ltd: The organization recently purchased Tek-Event Pty. Ltd., the maker of the Cell-Tek Microscope Chamber, a specialized device for regulating temperature, air flow, humidification, and air quality utilized in the ART and laboratory sectors across the world. We believe that this purchase expands the product range by adding a high-quality product line with substantial growth potential, as well as establishing a direct sales presence for Hamilton Thorne products in Australia.
  

Financial overview of Q1 2021 (Expressed in U.S. Dollars)

Source: Company

• In Q1 2021 the company posted sales of USD 11.5 million, improved from USD 10.3 million in the previous corresponding period (pcp).
• Gross profit surged to USD 5.8 million from USD 5.2 million in pcp, thanks to higher revenue, partially offset by an increased cost of sales.
• Total expenses increased to USD 4.6 million from USD 4.2 million in pcp, due to a higher general and administrative cost and slight increase in both research & development cost and general & administrative expense.
• Income from operations stood at USD 1.2 million, compared to USD 0.9 million in pcp.
• Net income stood significantly higher at USD 0.86 million v/s USD 0.14 million in pcp.

Risks associated with investment

There are trends and factors beyond the Company’s control that affect its operations and business. Such trends and factors include adverse changes in the conditions in the specific markets for the Company’s products and services, the conditions in the broader market of laboratory instruments, consumables and accessories and conditions in the domestic or global economy generally and competition.

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation

The firm had a strong first quarter in 2021, as the bulk of its customers returned to more routine operations, resulting in sales of USD 11.5 million, an increase of 11% year over year, with increased gross profit margins and profitability. Furthermore, the recent purchase of Tek-Event Pty Ltd, would expand the company's product range and strengthen its foothold in Australia, where it already services roughly 90% of in-vitro fertilization (IVF) clinics. Moreover, it provides software and services to Assisted Reproductive Technology (ART), and the industry is likely to grow from USD 17.5 billion in 2017 to USD 23 Billion in 2022. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 1.91 on July 15, 2021. We have considered Knight Therapeutics Inc, HLS Therapeutics Inc, Opsens Inc, etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on July 15, 2021). Source: REFINITIV, 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.