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

Synergistic Agreements with Other Pure-Play Businesses for Incremental Growth: Cann Group Limited (ASX: CAN) is a small-cap cannabis company with the market capitalization of circa $233.31 Mn as of March 19, 2019. As of now, the group is building a world-class business focused on breeding, cultivating and manufacturing medicinal cannabis for sale and use within Australia region. Mr. Peter Crock is the Chief Executive Officer or CEO of Cann Group Limited while Mr. Neil Belot is the Non-Executive Director. The company lately signed a broad, 3-year agreement with CSIRO (or Commonwealth Scientific and Industrial Research Organisation) to extend the research and development collaboration in the quarter ended December 2018. Through this, the company can investigate substantial opportunities throughout medicinal cannabis technologies. In December 2018 quarter, the company sealed a contract with the Victorian Department of Health and Human Services (or DHHS) through the Office of Medicinal Cannabis (or OMC). This contract relates to the supply of cannabis plant extract (resin). The agreement would be covering the supply of resin from April 2019 through to 30 June 2020. As at 31 December 2018, Cann Group’s net cash used in operating activities stood at $2.2 million and the company incurred payments towards business-related activities. It incurred $0.105 million towards research and development activities and $1.17 million towards the staff costs. Also, for the half-year ended December 2018, the company’s key margins like net margins and operating margins witnessed significant YoY improvement which further strengthens the confidence in the company’s expected future performance. In our view, the company has a decent outlook at the back of favourable regulatory approvals, strong research capability, and value-adding partnerships with pure-play businesses for incremental growth in the forthcoming years. The company might also be supported by the expansion programs and robust opportunity in the global market.

Building a Sustainable Growth Platform (Source: Company Reports)

Revised Expansion Plans- Augur Well For Long-Term Growth: Cann Group had made an announcement that they have entered in the HOA (or Heads of Agreement) in order to purchase the site which is located within Mildura Rural City Council in North West Victoria involving a consideration amounting to $10.75 million (plus GST) in order to construct the state-of-the-art greenhouse for the large scale cultivation and production of medicinal cannabis so that both domestic and export markets can be serviced. The company is presently operating two medicinal cannabis facilities in Melbourne.

There are anticipations that new greenhouse facility would be having the production capacity of up to 50,000 kilograms of dry flower per annum and it might be fully commissioned in the third quarter of the calendar year 2020. This facility is expected to have a construction cost amounting to around $130 million. The project is being financed with a mix of debt and equity. The company also made an announcement that they have entered into a 5-year agreement with Aurora Cannabis Inc for offtake of the medicinal cannabis which is produced by CAN at existing and planned expansion facilities until 2024. The company added that supply with regards to offtake agreement is subject to CAN and Aurora getting necessary regulatory approvals and strictly for medicinal purposes.

Cann Group would be focusing towards efficient production of medicinal cannabis at existing Southern and Northern facilities in Melbourne for the supply to Australian patients under Victorian Government DHHS contract and development of new product presentations. In addition, Cann Group would also be assessing and testing the available export pathways for the medicinal cannabis product. Hence, we trust the management’s ability to tap the further growth opportunities in the cannabis sector across the region on the back of its ongoing expansion strategy.
 

Key Partners (Source: Company Reports)

CAN Witnessed Numerous Commercial Activities in 1HFY19: In the half-year ended December 2018, Cann Group supplied first Australian patients with Aurora Cannabis Inc cannabis oil through TGA’s (or Therapeutic Good Administration) Special Access Scheme. The company acted as a sponsor to import the first products from the strategic partner as well as a major shareholder. Cann and IDT Australia Limited have executed the manufacturing agreement and, as a result, IDT would be providing manufacturing support with regards to medicinal cannabis-based product formulations which are intended for supply to the patients in Australia and overseas. The company witnessed an operating loss amounting to $4,898,171 after income tax for the half year ended 31 December 2018 while, in the same period of the previous year, it was $1,462,561. The company happens to be in a decent position with regards to its liquidity levels and is evidenced by its current ratio which stood at 49.95x which is significantly higher than the industry median of 2.41x which indicates that CAN is in the sound position to meet its short-term obligations. This improved performance exhibits that the group is refining its performance with its objectives and potential for further growth being intact.


1HFY19 Income Statement (Source: Company Reports)

Information About CAN’s Tullamarine Facility: CAN’s major expansion program, Project Tullamarine, is evolving and the final design phase is recently wrapped up by Aurora Larssen Projects (ALPS) for the state-of-the-art cultivation space, laboratories, and full GMP manufacturing facility. CAN happens to be on track to start construction on the facility in 1Q of 2019, and it continues discussions with numerous parties with regards to potential offtake agreements. Further, the Tullamarine facility might be fully operationalized by 3Q of 2020 with the production capacity of in between 40,000-50,000 Kg of dry flower equivalent.

A Brief Overview of Key Regulatory Approvals: Cann Group has been maintaining decent standing when it comes to securing of regulatory approvals as highlighted by it in the FY 2018 presentation. The company happens to be the first Australian recipient of cultivation licences of research & medicinal cannabis, and it has been granted permits for 2 cultivation & R&D (or Research & Development) facilities currently operational in Victoria. Also, the company is working closely with the government authorities which are involved. We expect that the company’s sound position with respect to regulatory approvals would continue to support the long-term growth of the company and this might also prove to be a key catalyst for growth in years to come. The company’s strong research capability is central to its strategy, and they have made a significant investment towards people and resources. Cann Group is committed towards science-based growth strategy.


Research Facilities (Source: Company Reports)

What Might Drive Growth for CAN Moving Forward: Cann Group has been focusing on building a strong platform which would be able to generate sustainable profits and shareholder value in the long term. The company is maintaining science-based focus and is also prioritizing deployments towards CAN’s expanded capacity and its numerous partnerships and collaborations. Moreover, the company appointed Mr. Shane Duncan as a General Manager Commercial with the objective of supporting commercial and go-to-market strategies which are expected to result in significant expansion in patient numbers being addressed by CAN.

As per the market update presentation for October 2018, the global medicinal cannabis market might touch US$100 billion by 2025 with the primary driver for the global growth being increasing legalization. We expect that Cann group is in a decent position to tap the growing opportunities which might arise moving forward and this might attract the attention of market players. Also, in the recent update, the company has reaffirmed the revenue guidance of $160 million-$200 million once the Mildura facility gets fully commissioned.

Stock Recommendation:  On the daily chart of Cann Group, Moving Average Convergence Divergence or MACD has been applied and default values were used for the purposes. After careful observation, it was noted that the MACD line has crossed the signal line and moved upwards after the crossover hinting bullishness. Therefore, there are expectations that the company’s stock price might witness a rise moving forward. On the other hand, the company is expected to be aided by strong liquidity position which is demonstrated by its current ratio (at the end of December 2018) which is higher than the industry median. Apart from this, its standing from the perspective of regulatory approvals might also aid the long-term growth prospects. However, the company’s stock has delivered -37.22% return in the past six months while, in the time frame of the previous three months, the stock’s return stood at -16.08%. Hence, considering the aforesaid facts and current trading level, we give a “Speculative Buy” recommendation on the stock at the current market price of A$2.30 per share (up 37.725% on 19 March 2019).   


CAN Daily Chart (Source: Thomson Reuters)

 
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