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

Decent Footing from the Regulatory Front: Cann Group Limited (ASX: CAN) recently gave insights with respect to its standing from the regulatory viewpoint. The company has been making progress from the regulatory context, and the company also stated that CAN happens to be the first Australian company which has got the cultivation as well as research licenses in the medical cannabis space. It also stated that it is in the list of the handful of the companies which are carrying out the operations in Australia with necessary permits.

The company has close relations with the regulatory bodies. Thus, it can be assumed that complying with the regulatory bodies as well as operating within the regulatory limits bodes well for the future performance of the Cann Group Limited.

Robust Research Ability to Support Cann Group: Cann Group possesses the robust research ability. The company has been making increased deployments when it comes to resources as well as people, and it had maintained its focus towards that strategy of growth which is based on science. The company has also been ramping up at a decent pace in regard to the expansion projects which implies that the company would be able to tap the opportunities which might arise in the future. The company believes the demand with respect to the innovative as well as safe medical cannabis treatments might witness a rise in the domestic as well as international markets. The company also believes that it is presently in a robust position to reap the benefits of the medical cannabis market which is rapidly growing.


Research Facility (Source: Company Reports)

Higher Payments to Employees as well as Suppliers Impacted Operating Cash Flows: Cann Group ended FY 2018 by generating the revenues amounting to $0.56 million. The company witnessed a rise in the loss which it has incurred before the finance, transaction costs as well as income tax expenses from $2.1 million in FY 2017 to $4.7 million in FY 2018. It was mainly impacted by the rise of administration and corporate expenses as well as research and development expenses. However, the company had witnessed $3.7 million of the net cash that got used in the operating activities in FY 2018. This implies a rise as in FY 2018 the net cash which was used in operating activities was $2.2 million and the primary reason could be a rise in the payments which the company had made to the employees as well as suppliers. In FY 2018, these payments amounted to $5.3 million while in FY 2017 the figure stood at $2.3 million. In our view, the company has a brighter outlook at the back of positive government intervention in the cannabis sector, secured agreement with CSIRO, synergistic partnership, innovation, and improving financials. Though the financials need to be on an improvement phase, CAN is expected to benefit from other company level developments and third party engagements.


CAN’s FY18 Financials (Source: Company Reports)

Agreement Secured with CSIRO – a Key Growth Catalyst: On October 2018, Cann Group Limited had made an announcement regarding the agreement with the CSIRO or Commonwealth Scientific and Industrial Research Organisation. The company had sealed a 3-year deal with CSIRO so that it can improve the collaboration with regard to the research and development. The top management of Cann Group reflected favourable views to this agreement and stated that the company’s commitment would be supported by the CSIRO’s experience, skills, as well as facilities. The company has been making efforts to build up a business which would be based on the science.

Additionally, the management of the company added that because of the agreement with the CSIRO, it would be able to work upon substantial opportunities. The key executive of CSIRO also reflected the favourable views in regard to the agreement. According to CSIRO’s executive, medical cannabis has been witnessing favourable momentum across the geographies. The CSIRO executive also stated that, as a result of this agreement, it would be working towards numerous discoveries which are possible with respect to the sector.

Increased Support from Government and Growth Prospects Would Help Cann Group: In November 2018, the top management of Cann Group reflected favourable views for the medicinal cannabis market on a broad basis. As per the management of the company, significant companies are planning to operate in the sector as well as the company also saw government support. Additionally, the stakeholders of Cann Group have also been helping to extend their support.

The Australian companies which are operating in the market would be witnessing numerous potential opportunities as Federal government had stated that the producers which are present in Australia could have the access of the international markets. Another factor which could support the Australian companies is the inclination of the countries towards the medicinal cannabis legalization. The management believes that the company is in the strong position to fully utilize the opportunities which are expected to build up in the future and it had been working towards the activities which could deliver shareholder value as well as support the company’s profits. On November 14, 2018, the top management of the company had stated that the export permit, which would be from the Federal regulator, would support the company. The export permit would help in gaining access to the international markets thereby garnering topline growth in future.

Improving the Capabilities Through Partnerships: In November 2018, the management of Cann Group had started that it has been making deployments towards the company’s capabilities. The management threw light on relationship with the CSIRO, Agriculture Victoria, Aurora Cannabis as well as La Trobe University. The management of the company also stated that the company is also focusing on the capacity expansion. There had been works in Northern as well as Southern facilities with a view of improving the throughput. Hence, we believe that these synergistic partnerships will help to increase the overall growth of the company in years ahead. Additionally, the management also highlighted about the capital raising program that was helped by the shareholders of the company.
 

CAN’s Relationships (Source: Company Reports)

CAN Positioned for Improvement because of Project Tullamarine: In the October 2018 market update, Cann Group had reflected favourable views in regard to Project Tullamarine. The company believes that the profitability would be supported by the Project Tullamarine. In the market update, the company had stated that the first design phase has been wrapped up. In the same update, it had also stated that the Stage 1 commissioning is expected to commence from Q4 2019 and there are expectations that it would be operated at the full capacity by Q3 2020. The management of the company, on November 14, 2018, reflected favourable views for the project which is near Tullamarine airport. They stated that they have decided to deploy fresh design as well as technological innovations and the facility has also been enhanced. The changes would help the company in terms of the efficiency of production and thus supporting the company to face the competition from the international markets.
 
  
Project Tullamarine Timeline (Source: Company Reports)

Stock Recommendation and Outlook: In the time-span of six months, the stock has delivered the return of -25.61% while in the previous three months, it had delivered a performance of -21.77%. Currently, it is trading at a lower level, signifying decent opportunity at the current juncture. From the technical standpoint, we have applied two technical indicators, named Moving Average Convergence Divergence or MACD, and Relative Strength Index or RSI, on the daily chart of Cann Group Limited, and the default values have been considered. After careful observation, it was found that the MACD line has crossed the signal line and is moving downwards which signifies the bearish momentum. On the other hand, the 14-day RSI has started to rebound from the oversold levels and thus, the bullish momentum is expected to build moving forward. Moreover, the key ratios of the company have also improved in FY 2018 on the YoY basis. The company’s EBITDA margin stood at -249.0% at the end of FY 2018 which reflects the significant improvement as compared to FY 2017 which was at -29,258.9%. Also, the company’s operating margin has also improved on the YoY basis to -313.8% in FY 2018. These improvements in the company’s key financial ratios further indicate about company’s expected performance moving forward. The company has also witnessed an improvement in the net margin. In FY 2018, the company posted a net margin of -314.3% reflecting an improvement as compared to FY 2017. Moreover, a significant improvement on the YoY basis was also encountered in the company’s return on equity or ROE in FY 2018 to -9.4%. Additionally, the company’s position to witness growth momentum as and when the cannabis market witnesses improvement coupled with the government support, decent footing when it comes to regulatory compliances as well as strong relationships are expected to support the company’s performance in the long-term. Also, the company is expected to witness positive impacts from the Project Tullamarine. Based on aforesaid facts and current trading scenario, we give a “Speculative Buy” recommendation on the stock at the current market price of A$2.160 per share (up 1.887% on December 11, 2018).


CAN Daily Chart (Source: Thomson Reuters)

 
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