Althea Group Holdings Limited 

AGH Details

Entered South African Cannabis Market: Althea Group Holdings Limited (ASX: AGH) is a provider of medicinal cannabis. The company holds licenses and permits for the importation, cultivation, production, and supply of medicinal cannabis in Australia. AGH has entered South African Cannabis market. African markets offer a huge opportunity for AGH to grow within medicinal cannabis market estimated at ~USD667mn by 2023. AGH has already captured a significant market share in medicinal cannabis across Australia, the UK and Germany. AGH’s first commercial shipment is destined for sale in Africa. 

3QFY21 Business Highlights:  AGH has reported an increase of 85% YoY in cash receipts to $2.75mn in 3QFY21. In addition, AGH has witnessed record monthly sales in March 2021 with a record number of patients in the same period. AGH has raised $3.78mn through share purchase plan. During 3QFY21, the company has completed first shipment of Althea products to Germany. Moreover, AGH’s subsidiary Peak Processing Solutions received a purchase order from WeedMD and Cronos Group. 

1HFY21 Financial Highlights: AGH has reported an increase in revenue to $5.09mn in 1HFY21 against $1.85mn in 1HFY20 due to increase in number of patients. AGH has reported an increase in gross profit to $2.77mn in 1HFY21 against $1.02mn in 1HFY20 due to increased revenue. The cash balance has been declined to $8.64mn as on 31 December 2020 against $10.14mn as on 30 June 2020. The non-current liabilities were increased to $2.88mn as on 31 December 2020 against $2.74mn as on 30 June 2020.

Revenue trend (Source: Analysis by Kalkine Group)

Key Risks: The company requires regulatory approvals being present in medicinal cannabis segment. Therefore, any delay in regulatory approvals may impact the business of the company. In addition, the company is exposed to foreign exchange prices. Therefore, adverse foreign exchange prices may impact the financials of the company.  

Outlook: AGH expects a sales revenue of $650k over the 2.5-year term of the agreement through its partner Africann (pty) Ltd (Africann). 

Stock Recommendation: The stock of AGH gave a return of ~-28.28% in the last three months and a return of ~-18.39% in the last three months. The current market capitalisation of AGH stands at ~$87.89mn as of 02 July 2021. The stock is currently trading below the average 52-weeks’ price level range of ~$0.30-~$0.67. On a TTM basis, the stock of AGH is trading at an EV/Sales multiple of 8.9x lower than the industry (Pharmaceutical) median of 13.0x, thus seems under-valued. Considering the company has entered African medicinal cannabis markets, significant increase in revenues in 1HFY21, increase in number of patients utilizing medicinal cannabis in Australia, current trading levels, key risks associated with the business, and valuation on TTM basis, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.355, up by 5.97% as on July 2, 2021.

AGH Daily Technical Chart, Data Source: REFINITIV 

Cann Group Limited 

CAN Details

Key Business Developments: Cann Group Limited (ASX: CAN) is focused on breeding, cultivating, manufacturing, and supplying medicinal cannabis for sale and use within Australia and for approved overseas export markets. CAN has invested CAD $1mn in Iuvo in January 2021 and signed an agreement to supply cannabis extracts until 31 December 2021 and further two years as a preferred supplier. CAN has supplied +20k units of cannabis extract to Iuvo Therapeutics, which has been so far the most significant order dispatched from Australia till date. The construction of Mildura plant has been restarted from February 2021 and expected to be completed by the end of 2021. The plant is likely to add capacity to produce 12,500kg of dry flower per annum at stage 1a and expecting to release first material by March 2022. CAN has recently acquired Satipharm, which is likely to contribute $1mn in revenues for six months ending 30 June 2021. Satipharm has distribution arrangements in Ireland, UK, and few Eastern European markets.  

1HFY21 Financial Highlights: CAN has registered an increase in revenue to $1.08mn in 1HFY21 against $0.56mn in 1HFY20 on the back of increasing shipping orders. The company has incurred a loss to $9.39mn in 1HFY21 despite posting an increase in revenue due to higher operating expenses. The cash balance has been increased to $27.65mn as on 31 December 2020 against $1.55mn as on 30 June 2020.

Revenue trend (Source: Analysis by Kalkine Group)

Key Risks: The company carries a risk of supply disruptions that may impact the business severely. In addition, the company is exposed to foreign exchange prices. Therefore, adverse foreign exchange prices may impact the financials of the company.  

Outlook: CAN has revised its total revenue guidance in a range of $4mn-$5mn for FY21, lowered from its previous guidance in a range of $$8mn-$10mn due to a shift in revenue recognition period. The balanced revenue is expected to be achieved in FY22. The company is focusing on getting regulatory approvals for international and local markets.

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of CAN gave a return of ~1.21% in the last one month and a return of ~-23.85% in the last three months. The current market capitalisation of CAN stands at ~$105.6mn as of 02 July 2021. The stock is currently trading below the average 52-weeks’ price level range of ~$0.290-~$0.995. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in % terms). We believe that the company can trade at a slight discount as compared to its peer median, considering the company has incurred a loss in 1HFY21 and lowered its revenue guidance for FY21. For this purpose, we have taken peers Suda Pharmaceuticals Ltd (ASX: SUD), Pharmaxis Ltd (ASX: PXS), Medlab Clinical Ltd (ASX: MDC) to name a few. Considering the company has registered an increase in revenue in 1HFY21, increase in cash balance as on 31 December 2020, associated business risks, current trading levels, and valuation, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.415 (as on July 2, 2021, 04.09 PM (GMT+10), Sydney, Eastern Australia).

CAN Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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