Company Overview: Cann Group Limited is an Australia-based company, which is engaged in the cultivation of cannabis for human medicinal and research purposes. The Company has facilities to cultivate medicinal cannabis. It also focuses on manufacturing medicinal cannabis products. It focuses on developing and supplying cannabis, cannabis resin and medicinal cannabis products into the Australian market. It also focuses on supplying to overseas markets. The Company has a cannabis research license and cannabis cultivation license. The cannabis cultivation license allows the Company to produce Australian grown material that can be prescribed for patient use. It has research and development, and cultivation facilities in Australia. It focuses on plant genetics; breeding; cultivation; extraction; analysis and production techniques to facilitate the supply of medicinal cannabis for a range of diseases and medical conditions.


CAN Details

Well placed to capitalise on opportunities: Cann Group Limited (ASX: CAN) is a small-cap company with the market capitalization of circa $407.48 Mn (as at July 17, 2018). The Company is the first Australian company to secure the necessary licences to undertake research and to cultivate cannabis for human medicinal and research purposes under the Australian Government’s new medicinal cannabis regulatory system. The company’s vision is to become the leading developer and supplier of cannabis, cannabis resin and medicinal cannabis products into the Australian market while entering global markets as they become available. The group focuses on medicinal cannabis, seeking to breed and grow varieties that will yield cannabinoid oils which are suitable to be incorporated in medicinal cannabis products for the specific treatment of the range of diseases and medical conditions, to achieve its key strategic objectives such as obtaining, growing and cross-breeding of cannabis varieties within controlled indoor conditions; develop research and development and technology to produce high yielding and high-quality cannabis product; and managing the implementation of the business in a phased manner subject to the current and expected future regulatory regime and long-term growth potential. We expect that the company is well placed to capitalize on opportunity supported by import and export licences, strategic alliance with medical practitioners, and expansion of existing controlled cultivation capabilities in Australia.
 

Company Overview (Source: Company Reports)

Phase 3 Capacity Expansion – a Key Driver of Growth: The company is progressing well with its growth strategy to substantially expand its cultivation capability, with funding in place to complete Phase 3. Following this, the group has committed to developing a 23,500 square metre state-of-the-art greenfield facility which includes GMP manufacturing operations. The objective of this new facility is to increase the efficiency and capacity of CAN’s operations, by incorporating the intellectual property and experience gained from the previous two facilities i.e., southern facilities and northern facilities. The new facility has an estimated cost of around $50 - 55 Mn. It will incorporate approximately 14,000 square metre of ‘flowering’ production area. The contract discussions have advanced with Larssen Ltd to retain specialist greenhouse engineering consultancy and technical consulting advice. The site selection is subject to obtaining various regulatory approvals, while the Phase 3 facility is expected to be operationalized in 1H FY19 to meet projected domestic demand and possible export demand. The group is currently undertaking studies regarding climate assessment; light evaluation; heat loss calculations; power and water consumption estimates; and site identification and assessment. We expect that this growth strategy will enable the company to improve its return on investment in terms of the substantial rise in volume growth after the completion of Phase 3 expansion project.
 

Growth Strategy (Source: Company Reports)

Quarterly Activity Update (31 March 2018): The company released its Quarterly report for the quarter ended 31 March 2018 wherein the group had total cash of $82.5 Mn and is actively involved in the new research and medicinal cannabis licences and permits which allow the group to continue to scale its business in 2018. During the quarter, the company has received two new licenses from the Office of Drug Control (ODC) to enable the continuation of cultivation and production of cannabis for research and medicinal purposes. Besides this, the Group has got the grant of import permits to get genetics and cannabis oils from its Canadian partners. Further, the group has been managing its cost base and expenditure with cash outflows from operating activity of $1.0 Mn, with investment in its product manufacturing and operating costs, staff costs and administration and corporate costs. The group remains cautious to manage its costs and cash position, and further targets business development activities to generate higher returns in near future. Moreover, the group estimated cash outflow for the next quarter of approximately $4,391K, comprising of Research and development (100K), Product manufacturing and operating costs ($430K), Leased assets (1K), Staff costs (600K), Administration and corporate costs ($460K), and other costs related to payments to acquire plant & equipment (2,800K).


Estimated Cash Outflow for Next Quarter (Source: Company Reports)

Export Market Opportunity – Supporting Top-line Growth: There is a significant export market opportunity for quality approved Australian medicinal cannabis. Canada is currently providing the ‘lead’ from both a regulatory and business structure perspective. The Healthcare Canada authority had registered 235,621 patients & 2,643 medical practitioners registered as at 31 December 2017 and has forecasted that 450,000 patients will use medicinal cannabis by 2024, with a potential demand of 130,000 – 250,000 kg per annum. Besides this, European markets are increasingly important to the cannabis sector. Each has a funded medical system, residents who seek natural & complementary therapies, & a government supported mandate to stop the rising drugs addiction related to chronic pain treatment. Hence, we expect growth on the back of: 1) consumption growth of medicinal cannabis in the Australia & Europe, 2) market share gains from overseas market, 3) higher exports to Europe market, and 4) better realization with the shift to value-added products.


Substantial & rapidly growing global market (Source: Company Reports)

Cannabis import and/or export license: Over the period, the group gained several licenses which allow the establishment of breeding the plants for propagation purposes; a research program to develop unique cannabis extracts; and the supply of plant material for manufacturing purpose for patient use.  Recently, the group was granted a license to import and/or export cannabis genetics and medicinal cannabis products from the Australian Government Department of Health, via Office of Drug Control (ODC). After this license, the group can now apply for a permit to export raw cannabis material and cannabis oil for analytical testing. The group is working closely with Canadian companies Aurora Cannabis and Anandia Laboratories to identify suitable genetics and medicinal cannabis products for inclusion in an import permit application.

Signed a head of agreement with Australia Pacific Airports: The group lately signed a head of agreement with Australia Pacific Airports (Melbourne) Pty Ltd (APAM) and secured the site of CAN’s proposed Stage 3 medicinal cannabis cultivation and GMP manufacturing facility. The relationship can be of support from export purposes. CAN’s total investment for the project is estimated at circa $100 million. Australia Pacific Airports (Melbourne) will fund and conduct a primary build of the facility. Moreover, the lease agreement for the site will allow for a substantially larger facility than previously scoped through expansion options. CAN with this agreement will be in a strong position for its Stage 3 expansion and the commissioning of the facility is expected 12 months from design completion.

Strategic Partnership to ensure Long-term growth: The group has formed a strategic alliance with several medical practitioners such as Aurora Cannabis, Agriculture Victoria, Commonwealth Scientific and Industrial Research Organisation (CSIRO), La Trobe University and Anandia Labs. These partnerships help to facilitate the acquisition of required licenses, government allowances, intellectual property, manufacturing facilities and wholesale distribution channels.


Strategic Partnership to ensure Long-term growth (Source: Company Reports)

Financial Highlights: During the first half of the year, the consolidated revenue from ordinary activity accounted to $44,102 in 1HFY18 which consists solely of research and development (R&D) credit received. However, the net operating loss after tax amounted to $1,462,561 in 1HFY18 from $925,785 in 1HFY17 at the back of higher administration and corporate expenses, depreciation and amortization expense, rising finance cost, and occupancy expenses during the same period. As a result, basic and diluted loss per share stood at 1.32 cents per share in 1HFY18 from 2.34 cps in the prior corresponding period. Besides this, the group has successfully raised around $78 million capital to fund Phase 3 expansion program during the first half. At present, the company enjoys its cash-rich position with nil debt facility. The current ratio substantially increased from 2.69x to 58.48x in 1HFY18 from the prior corresponding period. Further, the company has made a strong start to the second half of the financial year backed by commissioning of the Northern facility, with licences and permits received for the new facilities.


1HFY18 - Consolidated P&L Statement (Source: Company Reports)

Positive Outlook: Cann enjoys a strong presence in the medicinal cannabis business. It has been expanding its capacities to cater to emerging opportunities. Federal Government’s initiative to permit all Australian producers of medicinal cannabis to export their products to overseas markets will help to place CAN at the forefront of the industry in Australia and ensures sufficient capacity is available to meet both domestic needs and export opportunities. We are of the view that the company can be a big beneficiary of these developments in medium to long-term.


Industry Value Chain (Source: Company Reports)

Other Key Updates: The group has recently signed a memorandum of understanding (MOU) with La Trobe University to strengthen the relationship between the parties and boost Cann’s capabilities across plants genetics, breeding, and cultivation. Besides this, the group has appointed Mr. Neil Belot as a Director of the company. This followed Aurora’s participation in Cann’s $60 Mn placement in which it increased its holding in Cann to 22.9%. Moreover, the group has relocated its Corporate Headquarters to La Trobe University’s Technology Enterprise Centre in Victoria.

Stock Performance: CAN stock, as per March 2018 Quarterly Rebalance of the Ordinaries S&P Dow Jones Indices, was added to All Ordinaries, effective from March 19, 2018. Since listing on the ASX in May 2017 at an IPO of $0.30 per share, CAN’s share price has performed strongly and rewarded its investors through significant returns (up 403.45% in the last one year). On the valuation front, the company has improved its ROE to -3.5% in 1HFY18 from the previous half year (-21.4%), and the debt-to-equity ratio stood at zero. Over the last three years, the company’s revenue and loss attributable to members of the Group has been at CAGR of 21.3% and 22.0%, respectively. Given the decent outlook of medical cannabis sector supported by the regulatory bodies, synergistic investment into the business to strengthen organic growth, healthy balance sheet and availability at a reasonable price (with an 18.44% fall in last six months), we give a “Buy” recommendation on the stock at the current market price of $2.920.
 

CAN Daily Chart (Source: Thomson Reuters)

 
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