Company Overview: Cann Group Limited (ASX: CAN) was incorporated in Australia in 2015. The headquarter of the company is situated in Melbourne, Australia and it is being currently headed by Mr. Peter Crock – the Chief Executive Officer (CEO). It 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. The company’s vision is to be a leading developer and supplier of cannabis, cannabis resin and medicinal cannabis products into the Australian market, and to supply overseas markets.
 

CAN Details
Debt Free and Cash Rich Position: Cann Group Limited (ASX: CAN) has reported cash and cash equivalents of $49.57 Mn for FY 18 with the debt-free position. It implies that Cann Group can put the funds to operational uses rather than restricting them for the repayment of the debts. Moreover, Current ratio and Quick ratio substantially increased from 28.66x and 28.60x to 89.32x and 87.55x, respectively in FY18 over the prior year. It exhibits an overall good working capital management for the company and we expect the same to continue in years to come.


Current ratio (Source: Company Reports and Thomson Reuters)

Improving Return Ratio: The Company has substantially increased its RoE from -31.7% to -9.4% in FY18 over the prior year. It reflects that the company is making efforts to improve its ROE. Hence, we expect that the RoE will turnaround to positive in the upcoming period at the back of bottom line expansion and it will be supported by the thrust of Medicinal Cannabis product across the market.

 
Improving RoE (Source: Company Reports and  Thomson Reuters)

Medicinal Cannabis Sector – a Potential Market: There is robust global momentum around the merits of medicinal cannabis which is growing strongly with governments introducing and/or amending legislation to facilitate the legal use of medicinal cannabis in various countries around the world, including in Australia. This, combined with increasing opportunities in the sector, is driving greater general awareness and support for medicinal cannabis, along with a strong demand for investment. Medicinal cannabis is now seen as a potentially fast-growing and valuable sector by the investors and there has been considerable global interest in the cultivation and manufacture of medicinal cannabis products, alongside the growing demand from patients seeking access to these products. The market for medicinal cannabis in Canada was estimated at $144 million in 2014, rising to $380 million by 2018 and expected to grow by 23% a year to $1.3 billion in the next ten years. In other words, there is a significant export market opportunity for quality approved Australian medicinal cannabis players. 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 is forecasted to have 450,000 patients who 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, & government supported a mandate to stop the rising drugs addiction related to chronic pain treatment. Hence, we expect potential growth in Medicinal Cannabis Sector 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.
 
 
Health Canada ACMPR Registered Patients (Source: Company Reports)
 
Value-Adding Partnerships will Support Topline Growth: Cann Group Limited aims to be a leading developer and supplier of medicinal cannabis into the Australian market and to supply into overseas markets. Over the period, the company has formed a strategic alliance with several medical practitioners such as Aurora Cannabis, Agriculture Victoria, Commonwealth Scientific and Industrial Research Organization (CSIRO), La Trobe University and Anandia Labs. These partnerships will support to facilitate the acquisition of required licenses, government allowances, intellectual property, manufacturing facilities, and wholesale distribution channels and ensure long-term growth.


Value-Adding Partnerships (Source: Company Reports)
 
Financial Highlights: CAN posted a decent set of FY18 results wherein consolidated revenue increased by 18,692 percent and amounted to $1.50 Mn in FY18 as compared to the prior year. However, the loss after tax of the company was $4.72 Mn in FY18, compared to the loss after tax of $2.58 Mn in FY17, exhibiting de-growth of 82.61 percent on a Y-o-Y basis. Based on the remarkable topline growth, Gross Margin (GM) came in at 215.5% in FY18 which is higher than the industry median of 67.1%. Besides this, the company raised funds of approximately $78 million at a price of $2.50 per share in FY 18 with the objective of strengthening its operational facilities such as the construction of its Stage 3, large-scale cultivation facility and full GMP manufacturing capabilities. At the end of FY 19, it is expected that the construction on the Phase 3 expansion facility will be well underway. Overall, the company is in a sound financial position to continue with the expansion plans. No dividends have been paid or recommended during the year as the company uses its reserves for business expansion purpose.


FY18 - Consolidated P&L (Source: Company Reports)

Positive Outlook: We are affirmative on the company at the back of seeking positive momentum in the cannabis sector; robust innovation drive; footprint expansion; operational efficiencies; secured licenses; and favorable product mix. As of now, the group is actively pursuing opportunities to export its product mix portfolio to overseas markets that have legalized medicinal cannabis. We believe that the company has a brighter outlook backed by shareholder support in term of sound financial position, secured licenses, and a robust partnership with several medical practitioners.

Analysis and Stock Performance: Looking ahead to FY19 reporting period, CAN is committed to maintaining strong growth momentum. Moreover, the company anticipates having progressed the development of a range of new dosage forms, suitable for patients in Australia and in overseas markets. For that matter, the company has already secured its export license underpinned by synergistic agreement with many global players which allows starting sales in the overseas market. From the analysis standpoint, CAN’s FY18 annual report analysis highlights improved sales performance, with topline growth of 18,962% on Y-o-Y basis is aided by the robust demand of medical cannabis in the market. However, consolidated operating cash outflow inclined to $3.75 Mn (FY17: $2.29 Mn) due to suppliers and employees payout of $5.31 Mn and uplift in inventories during the same period. The free cash flow scenario needs to be improved while CAN is investing in clinical trials and other developments. The stock has a market capitalization of $378.31 Mn, a price-to-book value ratio of 5.69x and a beta of 1.03x as of October 01, 2018, exhibiting undervalued level at the current juncture and representing low risk option among the peer group. The company is making efforts to improve its ROE and the stock has been added to S&P ASX All Ordinaries Index effective from 19 March 2018, and has strong underlying fundamentals. Meanwhile, CAN stock has moved up over 126.78 percent in the last one year (as of October 01, 2018) and traded at the lowest level, but we believe that the long-term potential stays resilient based on the progress seen in 2018. Hence, we give a “Speculative Buy” on the stock at the current price of $2.71, which has respected support level of $2.58 post the fall of about 16% in last three months.
 

CAN Daily Chart (Source: Thomson Reuters)
 
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