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

Strategic Agreements for Overall Growth: Cann Group Limited (ASX: CAN) is an ASX-listed company whose principal activities revolve around the cultivation of medicinal cannabis. As on July 30, 2019, the market capitalisation of Cann Group Limited stood at ~A$304.88 million. The company earlier reported its results for the half-year ended December 2018 in which its revenue from ordinary activities amounted to $95K consisting largely of research and development credits which amounted to $92K, and the remaining $3K consist of the revenue from ordinary activities received from the sale of products. During the period, Cann and IDT Australia Limited executed the manufacturing agreement wherein IDT has been contracted to give manufacturing support in relation to medicinal cannabis?based product formulations intended for supply to patients in Australia and abroad. The company also secured a contract with Victorian Department of Health and Human Services (or DHHS), through the OMC (or Office of Medicinal Cannabis), for the supply of cannabis plant extract (resin). In 1H FY19, the company signed a broad, three-year agreement with Commonwealth Scientific and Industrial Research Organisation (or CSIRO) in order to extend the research and development collaboration. The agreement enables the company to investigate a number of opportunities throughout medicinal cannabis technologies.

Moving forward, there are expectations that the growing global market, opportunity in Australia, recreational use in Canada, and opening up of the European markets might act as tailwinds for the company in the long-run. Additionally, the company’s financial position is expected to be supported by the Mildura facility.

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Consolidated Profit Or Loss Statement (Source: Company Reports)

Top 10 Shareholders: The following table provides a broader overview of the top 10 shareholders in Cann Group Limited:


Top 10 Shareholders (Source: Thomson Reuters)

Improvement in Margins Reflects Improving Financials: In 1H FY 2019, Cann Group Limited’s key financial ratios have witnessed an improvement on a YoY basis and, thus, it can be said that the company has been improving its financials. Also, it looks like that the company has robust liquidity levels. Its current ratio for 1H FY19 stood at 49.95x, which is significantly higher than the industry median of 1.94x. A higher current ratio indicates that short-term obligations can be met easily. The company could also make deployments towards its key strategic business initiatives which could help it achieve long-term growth. Coming to the company’s balance sheet position, CAN’s cash and short-term investments base has been increased from FY15 to FY18 and, thus, it can be said that the company’s well-built cash levels place it in a significant position to achieve growth objectives. Also, the company’s total current asset base has been improving since FY15 to FY18, which can also be considered as a positive for the overall company. 
 

Key Metrics (Source: Thomson Reuters)

Wrapping Up of Strategic Investment in Pure Cann: Cann Group Limited has made a strategic investment in order to acquire a 20% ownership of Pure Cann NZ Limited, which happens to be a New Zealand-based medicinal cannabis company. As per the release, the New Zealand Government anticipates the introduction of the new regulations, licensing requirements, and quality standards governing the medicinal cannabis usage by the calendar year-end. The company also has an option to increase that position to 30%. Cann Group and Pure Cann would be working to capitalise on growing domestic demand for the medicinal cannabis in NZ and explore potential opportunities for the export as Pure Cann develops its own proposed cultivation and production facilities.

Key Takeaways from June 2019 Quarterly Activities Report: During the quarter ended June 2019, the Victorian Government took delivery of the first Australian sourced and commercially grown cannabis resin for use by Australian patients. The cannabis resin has been extracted from dry cannabis flower produced at CAN’s Southern Facility in Melbourne as a part of its supply contract with the Victorian Department of Health and Human Services (or DHHS). In June 2019 quarter, the company’s sales stood at $2.3 million, which reflects a significant increase of 413% on the previous financial year. During June 2019 quarter, CAN took the possession of Mildura site which has been secured as part of the planned third facility.


Net Cash Used in Operating Activities (Source: Company Reports)

In June 2019 quarter, the company’s net cash used in operating activities stood at A$2.08 million. In late June, Aurora Cannabis received import permit from Health Canada for the cannabis cultivated by CAN. Cann Group delivered material to its manufacturing partner, named IDT Australia, for Good Manufacturing Practice (or GMP) testing, labeling and packing before CAN exports this product. IDT Australia made an announcement that it had been granted manufacturing licence by Office of Drug Control (or ODC), which allows it to undertake the various activities which are related to manufacturing of the medicinal cannabis products.

Securing of Manufacturing Licences: Cann Group Limited made an announcement that Federal Department of Health’s Office of Drug Control (or ODC) approved the manufacturing licences for CAN’s existing Northern and Southern medicinal cannabis facilities in Melbourne. The company is now holding all cultivation, production and manufacture licences under the Narcotics Drugs Act, together with the import and export licences under the Customs Act. Key personnel of CAN stated that the licences would be complementing the manufacturing arrangements in place with the IDT Australia Ltd. Additionally, it was added that securing the ODC manufacturing licences happens to be an important milestone that supports fully integrated business model strategy.

Existing facilities Might Support Long-Term Prospects: In the investor presentation of April 2019, Cann Group Limited stated that Mildura facility gives a clear pathway to the sustained profitability which could help the company in further improving its financial position. The following picture would help the investors in this regard:


Pathway To Growth (Source: Company Reports)

In the same presentation, the company added that its existing facilities are expected to support in the long-term. The company’s southern facility happens to be have a proven capability to produce the medicinal grade cannabis while northern facility supports numerous research programs to be conducted by CAN, independently and with the third party research bodies. 

Growing Global Market and Opportunity To Export Might Act As Tailwinds: As per April 2019 investor presentation, the global legal market has been estimated to be at US$20 billion, and there are expectations that, by 2027, it would reach to approximately US$232 billion.  It was also mentioned that over 50 countries have legalised medicinal cannabis, and there are expectations that around 10 another countries would also legalise this year. Additionally, recreational use in markets like Canada is placing pressure on the supply of medicinal cannabis.

The presentation also threw light on the export opportunity, and it was mentioned that European markets are opening up, and under medicinal use, cannabis has been authorised in over 25 European countries. In April 2019 investor presentation, the company added that the key partnerships complement the in-house skills as well as capabilities, and the following picture is important in this regard:


Key Partnerships (Source: Company Reports)

What To Expect From CAN Moving Forward: The April 2019 investor presentation also provided some information on the Australian opportunity as well. It stated that the industry body has been established, named Medicinal Cannabis Industry Australia (or MCIA), in order to represent the interests of the members & other stakeholders in the Australian market. The company stated that the access was legalised in 2017 and the state hurdles are being removed.


Australian Opportunity (Source: Company Reports)

With respect to the growing global market, the company added that registered patient numbers are growing in the various geographies. Recently, the company added that, as it moves toward operating at scale, progressing the construction and development of the new Mildura facility would be the focus. Additionally, it was mentioned that debt funding arrangements which are required for the facility are progressing and there are expectations that they would be confirmed. The company has been refining the commercial strategy, investigating the several paths to market in addition to the clinical trial involvement that would be vital to developing the medicinal cannabis sector.


Key Valuation Metrics (Source: Thomson Reuters)

Stock Recommendation: The stock of Cann Group Limited has delivered the return of 7.50% on a YTD basis while, in the span of previous one month, the stock’s return stood at 9.14% which can be considered at respectable levels. During the quarter ended June 2019, the company wrapped up its first harvest of the internationally sourced genetics as it is expanding the capabilities as commercial medicinal cannabis cultivator. With respect to the manufacturing partnership with the IDT Australia, Cann Group added that IDT brings excellent capabilities and experience when it comes to the manufacture of cGMP quality pharmaceuticals.

Considering the above-mentioned facts and rapidly growing medicinal cannabis market across the globe, we are affirmative on the stock and expect that CAN holds a decent potential to grow further. Hence,we give a “Buy” recommendation on the stock at the current market price of A$2.180 per share (up 1.395% on 30 July 2019).
 
 
CAN Daily Chart (Source: Thomson Reuters)

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