CANN Group Limited

Progressing on Debt Mix to Fund Construction Cost: CANN Group Limited (ASX: CAN) is engaged with the operations of breeding, cultivating & manufacturing medicinal cannabis for sale and use within Australia and internationally.
 
The company, on 13 June 2019 issued 100,000 fully paid ordinary shares as a result of a holder of Underwriting Options exercising those options, without disclosure to the investor as per Part 6D.2 of the Corporations Act. The company has complied with other necessary acts as per requirement.
 
Among the major expansion program, the company purchased Mildura site for $10.75 million for construction of facility comprising of world scale greenhouse & associated support areas with an expected production capacity of up to 50,000kg of dry flower per year. The company will fund $130 million of construction cost using a mix of debt (progressing) & existing balance sheet equity. The company recently updated that the Victorian Government has taken delivery of the first Australian sourced and commercially grown cannabis resin for use by Australian patients.
 
The company has a manufacturing partnership with IDT Australia as it provides manufacturing support to CANN in relation to cannabis-based product formulations. Moreover, it has entered into a supply agreement with Victorian DHHS for the supply of cannabis plant extract or resin. The estimated global legal market is expected to be ~US$232 billion by 2027, with huge opportunity for the company to grow, precisely access to cannabis in Australia being legalised in 2017 and state hurdles being removed.
 

Consolidate Profit & Loss Statement 1HFY19 (Source: Company Reports)
 
The revenue from ordinary activities stood at $95K, which consists primarily of research & development credits received amounting to $92K, and the remaining $3K consists of revenue from ordinary activities received from the sale of products. The net loss from ordinary activities increased by $3.436 million to $4.898 million, primarily on higher R&D costs, administrative & corporate costs, and fair value adjustments on biological assets.
 
Expectations Ahead: Going forward, the company expects to progress in the development of a range of new dosage forms, suitable for patients in Australia and in overseas markets. CANN is ready to step up its engagement with the medical community as it supports a streamlining of the requirements for patient access. Additionally, it will help the medical professionals to ensure that they have the resources which are required to make decisions on the suitability of medicinal cannabis treatment for their patients.
 
Meanwhile, the stock has yielded a YTD return of 4.50%. With the higher operating cost burden, the bottom-line remained under pressure, however, the company is poised for growth going forward, underpinned by strong global opportunities and its expansion programs. Hence, we recommend a “Buy” rating on the stock at the current market price of A$2.080 (down 0.478% on 13 June 2019).
 
 

THC Global Group Limited

Manufacturing License Received from the Australian Office of Drug Control: THC Global Group Limited (ASX: THC) is undergoing acquisitions & expansion into many jurisdictions including Canada. The company has been into global sales business via the USA and Europe, with its strategy to become a global-scale vendor of medicinal cannabis.

The company in its recent release updated that, it has received a Manufacturing Licence through its wholly owned subsidiary Canndeo Limited. The license will help the company to produce extracts and tinctures of cannabis & resin from the Australian Office of Drug Control. With this significant achievement of the license, the company’s ‘Farm to Pharma’ vertical integration strategy has been completed. The company is currently able to cultivate its own proprietary strains, process cannabis plant material, and manufacture extracts and tinctures from cannabis. The company prepares to commence delivery of Australian grown, Australian manufactured medicinal cannabis products to domestic patients and the global export market.
 

Profit & Loss Statement FY2018 (Source: Company Reports)
 
On the financial front, the losses of the company stood at $8.61 million in FY18 as compared to $2.55 million in FY17, with a cash balance of $6.33 million in FY 18 as compared to ~$11.03 million in the previous year. The loss was, however, primarily driven by higher COGS along with substantial increase in impairment expenses and share based payments. The cash was lower, primarily back of payments to suppliers and employees and capex on land & buildings.
 
THC made an agreement with EVE Investments Limited. The agreement is related to site lease, tea?tree off?take, cannabis off-take, and are directed towards the organic farming operations of THC Global as well as the development of novel tea?tree and cannabis products by both THC Global and EVE.
 
The company has adopted AASB 15 revenue for the first time in 2018 financial year. The revenue will be recognized when the goods have been delivered and accepted by customers at their premises.
 
What To Expect Going Forward: The company is confident of delivering significant revenues from its medicinal cannabis operations within FY19. THC intends to capitalize on its investment on R&D and utilize its operational assets to optimum use and take advantage of the global reach of the company through strategic commercial partnerships and acquisitions that it has secured.
 
Stock Recommendation: With several success in the past year, including acquisition of world class bio-pharma extraction facility ready for manufacturing high quality medicinal cannabis, securing key cannabis cultivation sites, developing several commercial partnerships, expansion of global activities, we believe that the company will be able to generate revenue, however the adoption of AASB 15 will be a key factor to watch out for. Hence, we recommend a “Hold” rating on the stock at CMP of $0.485 (up ~10.22% as of 13 June 2019).

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