Company Overview: THC Global Group Ltd, formerly The Hydroponics Company Limited, is an Australia-based company, which is engaged in the business of cannabis. The Company is engaged in the development and delivery of medicinal cannabis. The Company also manufactures and distributors of hydroponics equipment, materials and nutrients. The Company is also engaged in hydroponic greenhouse design and construction. The Company also offers various products, such as Payload Extraction Bags; DigiLume Lighting; Quick Flips Relays; Spin Pro Trimmers; Wind King Fan; Nanolux Ceramic Metal Halide; Elemental Controls, and The Rack Drying System. Its Quick Flips are a patent pending lighting relay. The interlocking modular design allows the user to build custom flip boards in any combination. Its Spin Pro Trimmers is used for the removal of protruding leaves and roots, for the preparation of plants for essential oils. Its Elemental Controls provide premium temperature control for commercial hydroponic systems.
THC Details
Decent Outlook: THC Global Group Limited (ASX: THC) operates under ‘Farm to Pharma’ pharmaceutical model, and it is currently delivering the high-quality medicinal cannabis products to the Australian patients via existing access schemes. As on September 20, 2019, THC has a market capitalisation of ~A$60.01 million. The company has recently released its results for half-year to June 2019 and stated that THC Global is now the holder of a full suite of cannabis licences in Australia which enables a Farm to Pharma production model. Further, it was stated that the secondary manufacturing licence had been held for the company’s Bundaberg R&D Facility which would be enabling small scale extraction and manufacture for product development. Since the company has secured a significant growing capacity over multiple proprietary cultivation sites, and an industry-leading pharmaceuticals biomanufacturing facility with attached testing and product development laboratory, THC happens to be in the prime position in order to service domestic patients and global export market. Its commercial partners operate throughout 4 continents, which supports future international growth.
In the month of July 2019, THC’s wholly-owned subsidiary, named THC Pharma Pty Ltd, was granted the manufacture licence from the Australian Office of Drug Control for its Southport Manufacturing Facility. On August 23, 2019, the company has issued 50,000 shares to a consultant for services under a consultancy agreement and also further tranches of THC006, THC007 and THC008 options under the employee option plan. The company had cash and cash equivalents of $5,689,612 as at June 30, 2019. As at that date, its net current assets stood at $7,695,040 while total assets of $31,409,840. If and when required, the company has an ability to (1) continue to raise additional funds on a timely basis, and (2) scale back a significant portion of development activities.
In a recent release, the company’s key personnel stated that THC would be making high quality medicinal cannabis more accessible to the Australian patients in need, in terms of heavily reduced cost and increases in the available supply. The company expects to support clinical trials and study trials in Australia, which are almost exclusively serviced by expensive imported products.
Segment Performance (Source: Company Reports)
Top 10 Shareholders: The following table provides a broader idea of the top 10 shareholders in THC Global Group Limited:
Top 10 Shareholders (Source: Thomson Reuters)
Improvement in Key Margins on a YoY Basis: There has been an improvement in the company’s key margins in 1H FY19 on a YoY basis, which reflects that it is possessing a decent base of fundamentals. The company’s current ratio stood at 8.71x in 1H FY19, which is significantly higher than the industry median of 1.68x and, therefore, it can be said that THC has a decent liquidity position which could help it in meeting its short-term obligations. Additionally, it looks like THC has sufficient headroom to make deployments towards strategic business activities which could help in long-term growth.
Key Metrics (Source: Thomson Reuters)
The company’s Debt/Equity ratio stood at 0.02x in 1H FY19, which is lower than the industry median of 0.11x and, thus, it can be said that THC’s balance sheet is less leveraged as compared to the broader industry. Generally, lower debt on the balance sheet reflects stability, and the company can focus towards long-term growth. The company’s percentage of long-term debt to total capital stood at 1.5% in 1H FY19, which is lower than the industry median of 4.8% and, thus, it can be said that THC’s exposure towards the long-term debt is lower when compared to the broader industry.
Agreement Secured to Lease A Property: THC Global Group Limited has recently advised that it has secured an agreement to lease a property with 66,000 square metre of the existing hydroponics greenhouses, and an additional 180,000 square metre of the agricultural land for cultivation of medicinal cannabis in Bundaberg, Queensland. In the release, it was stated that the property is in addition to THC’s existing Bundaberg and Northern NSW cannabis cultivation facilities.
The company expects to produce an initial 80,000kg of dried cannabis flower from hydroponics growing annually at the property, with the potential to increase the capacity via exploitation of open-field cultivation area. In addition to medicinal cannabis, the company would be exploring using part of open-field land for the hemp cultivation, which would enable it to enter food and nutraceutical markets globally.
Southport Facility Opened by The Federal Minister for Health: THC Global Group Limited recently advised that its Southport Facility was opened by Federal Minister for Health, The Honourable Greg Hunt MP, following the tour of facility. It was stated that the Southport Facility has an expected initial capacity for the annual production of 12,000kg of Good Manufacturing Practices (or GMP) certified Active Pharmaceutical Ingredient (or API) isolates, or equivalent quantities of the full-spectrum and broad-spectrum extracts. It also anticipates to be able to further process these extracts into the finished medicines like oils, tinctures, and capsules following the granting of additional approvals.
Quarterly Update of THC Global: THC Global Group Limited provided an update on its activities for the quarter ended June 30, 2019. In the report, it was mentioned that the company is holding a full suite of cannabis licences in Australia including two manufacture licences for two facilities. The company happens to be in the unique position in Canada as Nova Scotia project has received a letter of readiness from Canadian cannabis regulator, potentially grandfathering project into the earlier cannabis regulations enabling the quicker licencing process. It is in the late-stage negotiations with number of the potential funders for project, which would be allowing the project to achieve the revenue-generating production in the near term, along with limited upfront capital outlay. The following image provides an overview of the net cash used in operating activities:
Net Cash Used in Operating Activities (Source: Company Reports)
In order to support the development of Canadian operations, THC has made an appointment of Laura Harvey as the Chief Operating Officer of THC Global’s Canadian operations.
What to Expect from THC Moving Forward: The company is expecting to wrap up the product validation at Southport Facility by 2019 end, and it also expects the first commercial production in early 2020. The product would be made available to the Australian patients, Australian study trials, as well as for global export market. The company would be highly competitive in this market because of achieving the low cost of production from both of its Farm to Pharma integrated production, and the benefits of Southport Facility’s technology and capability.
The company anticipates to be a first commercial-scale producer of the Australian medicinal cannabis products for the Australian patients and in global export market because it owns the largest processing facility of its kind in Southern Hemisphere. As per the quarterly update, THC is expecting to wrap up the product validation for Therapeutic Goods Administration (or TGA) certified bulk API handling and production at Southport Facility, and receipt of the permit to commence manufacturing from Office of Drug Control (or ODC) in Q4 FY19. This would be followed by the commencement of revenue-generating production in early 2020. Moreover, on the completion of validation, THC would be commencing formulation of medicinal cannabis products which would be supplied to select study and clinical trials in Australia and Asia. The company is expecting to see new revenue opportunities arise in Canada throughout its business units following the further regulatory changes effective in the month of October 2019 allowing for production as well as sale of cannabis extracts, edibles, and topicals.
Key Valuation Metrics (Source: Thomson Reuters)
Stock Recommendation: The stock of THC Global Group Limited has witnessed a fall of 6.38% on the YTD basis while, in the time frame of the past 6 months, it has fallen 19.27%. Currently, the stock is trading closer to its 52-week lower levels $0.410, indicating a decent opportunity for accumulation. The company’s total revenue has witnessed an increased between the time span of FY16- FY18, which reflects that it possesses decent capabilities to generate revenues. There are expectations that these capabilities might support its long-term growth and can help it in gaining traction among the market participants. Hence, considering the decent outlook for medicinal cannabis sector, favourable balance sheet position, availability at a reasonable price (with a correction of 19.27% in the last six months), we give a “Speculative Buy” recommendation on the stock at the current market price of A$0.435 per share (down 1.136% on 20 September 2019).
THC Daily Technical Chart (Source: Thomson Reuters)
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