blue-chip

Two TSX Listed Stocks to Hold – WEED and TOY

Apr 14, 2021 | Team Kalkine
Two TSX Listed Stocks to Hold – WEED and TOY

 

Canopy Growth Corp.

Canopy Growth Corp. (TSX: WEED), formerly Tweed Marijuana Inc, is a Canada-based multi-brand cannabis company, which is engaged in producing and selling of legal marijuana in the Canadian medical market through its subsidiaries. Its core brands are Tweed and Bedrocan.

Key highlights

  • Riding on the wave of acquisitions: Recently, the Company acquired AV Cannabis Inc. ("Ace Valley") - one of Ontario's leading cannabis brands with a strong focus on ready-to-enjoy (RTE) products. The acquisition would strengthen the Company's industry-leading house of brands. Furthermore, it agreed to acquire Supreme Cannabis in a transaction valued at approximately CAD 435 million. We believe this acquisition would solidify its leadership position in the Canadian recreational market and positioned it well for growth.

Source: Company

  • Launched CBD beverage product in the U.S: The company made its presence in the high-potential U.S. CBD beverage category with the launch of Quatreau, a premium ready-to-drink CBD-infused sparkling water. Beverages are fueling growth in the CBD category, and the company believes this product would resonate with the U.S. consumers.

Financial overview of Q3 2021 (In thousands of CAD)

Source: Company

  • In Q3 2021, the Company posted higher net revenue at CAD 152.5 million, against CAD 123.7 million in the previous corresponding period. The rise in revenue was primarily due to the Canadian recreational B2C channel.
  • Driven by higher operating expenses coupled with an asset impairment cost of CAD 400.4 million, the period's profitability declined. The Company reported a higher net loss of CAD 829.2 million, against CAD 109.6 million in the previous corresponding period.
  • The cash balance as on 31 December 2020 declined to CAD 824.9 million (31 March 2020: CAD 1.3 billion).

Risks associated with investment

The Company operates in challenging market conditions which may impact the operation performance and reduce financial performance. Any change in regulations and government policies could affect the overall business of the Company.

Valuation Methodology (Illustrative): EV to Sales 

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

Stock recommendation

The Company has shown a decline in financial performance in Q3 2021. Despite the higher revenue, the bottom-line performance declined, while profitability margins remained in the negative zone. However, with the recent acquisition of AV Cannabis and another acquisition in the pipeline, the Company would strengthen its position with the industry-leading house of brands. Furthermore, WEED made its presence in the high-potential U.S. CBD beverage category with the launch of Quatreau, a premium ready-to-drink CBD-infused sparkling water, which is a positive step. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating on the stocks at the closing price of CAD 34.89 on April 13, 2021.

1-Year Price Chart (as on April 13, 2021). Source: Refinitiv (Thomson Reuters)

 

Spin Master Corp.

Spin Master Corp. (TSX: TOY) is a children's entertainment company operating in the nearly USD 100 billion global toy industry. The group creates, designs, manufactures, and distributes a portfolio of products, brands, and entertainment properties across five key categories, namely outdoor, remote control and interactive, boys action and construction, preschool and girls, and activities games and puzzles and plush. 

Key Highlights:

  • Growing traction from Digital Games: In the recent past, the company reported an impressive performance from its digital segment. Within the segment, the Company develops digital applications which are hosted by third-party platform providers. The Company is focusing on organic growth through internal design and development, capitalizing on current and future trends. Notably, in FY20, Digital games revenue grew to USD 76.8 million from USD 26.2 million in FY19. The increase was supported by an increase in Toca Monthly Active Users at ~40 million, grew 135% on y-o-y basis, while its Sago Active Subscribers went up by 102% from FY19 to ~242k.

                      

               

Source: Company Presentation

  • Association with TerraCycle : Recently, the company collaborated with international recycling player TerraCycle in order to make its toys and games within the United States. For preserving the environment, the consumers can send Spin Master toys and games to TerraCycle for recycling purpose. 
  • Event Update: The Group would disclose its first quarter FY21 financial result on May 5, 2021. 

Q4FY20 Financial Highlights:

  • TOY declared its quarterly results, wherein the company posted improved revenue of USD 490.6 million, as compared to USD 473.5 million in the previous corresponding period (pcp). The increase was driven by significantly higher digital games revenue of USD 31.8 million, as compared to USD 6.3 million in Q4FY19.
  • Gross profit stood at USD 241.0 million, higher from USD 226.1 million in Q4FY19. The increase was majorly due to a higher income, partially offset by a slightly higher cost of sales (USD 249.6 million v/s USD 247.4 million in pcp).
  • The quarter was marked by a higher administrative expense (USD 76.7 million, v/s USD 66.6 million in pcp) and an increase in depreciation and amortization expenses (USD 10.0 million v/s USD 8.8 million in Q4FY19), partially supported by lower selling, marketing, distribution and product development (USD 135.1 million, v/s USD 164.8 million in pcp).
  • Net income stood at USD 0.3 million, as compared to a net loss of USD 17.2 million in Q4FY19.
  • The group reported its cash balance of USD 320.6 million, while total assets stood at USD 1,342.1 million.

Source: Company Report

Risk: Change in consumer preference might take a toll on the demand. Moreover, the group must focus on creative innovations to remain competitive within the industry. 

Stock Recommendation:

The company has an available liquidity of USD 838.0 million at the end of FY20, which seems to be sufficient to meet its operational requirements. Free cash flows increased to USD 232.1 million v/s USD 4.7 million in FY19, supported by strong growth from operating cash flows. Moreover, the company focused on optimizing inventory levels and reported its inventories at USD 102.0 million, down 45% on y-o-y basis. Going forward, the group would continue to innovate using its global internal and external R&D network and would focus on increasing sales in International Developing and Emerging Markets. On the valuation front, the stock is trading at a forward EV to Sales Multiple of 1.6x v/s the industry (Consumer Cyclicals) average of 2.8x, reflecting a further room for price appreciation. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 39.26 on April 13, 2021.

One-Year Price Chart (as on April 13, 2021). Source: Refinitiv (Thomson Reuters)


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.