Cann Group Limited

CAN Details

Proposed Issue of Securities: Cann Group Limited (ASX: CAN) engages in the manufacturing and supply of medicinal cannabis for medical and research purposes. Cann cultivates the licensed cannabis for a range of diseases and medical conditions in Australia. The market capitalisation of the company as on 14 May 2021 stood at $115.30 million. As per a recent announcement, the company has proposed 67,543 issues of securities at a price of AUD 0.570.

Recall of Product: The company has recently announced that it has received a notice from one of its customers. The customer has started a class III recall in respect of 250 units of 50ml medicinal cannabis oil products released in the Australian market.   

Shipment to German Partner iuvo: On 30 April 2021, CAN has announced the export of cannabis to German customer iuvo Therapeutics, and the shipment consists of more than 20,000 units of CAN’s 30ml bottles of cannabis extract.

Q3FY21 Business Performance: During the period, the company has reported an improvement in cash flow to $3.99 million compared to the previous quarter. Cann has recorded a decline in manufacturing cost and inventory by ~23% to $2.08 million in Q3FY21 vs $2.69 million in Q2FY21. There was an increase in a receipt from ATO'S R&D Tax incentive scheme to $3.3 million in Q3FY21 vs $2.7 million in Q2FY21.

Q3FY21 Cash Flow Performance (Source: Company Reports)

Outlook: Cann has announced the strategic acquisition of Satipharm to grow the low-dose CBD market segment. It plans to support the growth of Satipharm’s existing European sales with further investment in marketing activities. The company is investing in Mildura to mitigate the risk of the supply chain.

Key Risks: The company reported a cyber-security issue on 8 Feb 2021, which spent $3.57 million that might have an impact on the company’s core operations.

Stock Recommendation: The company has reported a double in supply to customers and compounding pharmacies with a rise from 1400 to 3000 units in Q3FY21 from the previous quarter. The stock of CAN is trading below its average 52-weeks’ levels of $0.290-$1.255. The stock of CAN gave a positive return of ~30.15% in the past six months and a negative return of ~16.32% in the past one week. On a technical analysis front, the stock of CAN has a support level of ~$0.314 and a resistance level of ~$0.57. Considering the current trading level, improvement in the cash flow, export of products, and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.410, down by 1.205% as on May 14, 2021.

CAN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)  

Epsilon Healthcare Limited

EPN Details

Business Update: Epsilon Healthcare Limited (ASX: EPN) manufactures and delivers pharmaceutical equipment, nutrients as well as cultivates medicinal cannabis in Australia and Canada. EPN facilitates the e-commerce solution for nutraceuticals and cannabis. The market capitalisation of the company as on 14 May 2021 stood at $30.83 million. On 11 March 2021, the Company’s telehealth medicinal cannabis clinic group, Tetra Health has launched an in-person consultancy partnered with Astrid Healthcare Pty Ltd (Astrid) co-located at the Astrid Dispensary in South Yarra.

Q1FY2021 Financial Performance: During the period, the company has reported an improved cash receipts from customers with an increase of 43% to $1.76 million in Q1FY21 compared to Q1FY20. EPN has recorded a reduction in net cash used in operating expenses of 23% compared to Q4FY20. At the end of the period, it recorded a cash balance of $4.62 million.

Q1FY21 Cash Flow from Operations (Source: Company Reports)

Outlook: EPN has a target of launching the first in-person Tetra clinic in New South Wales, Queensland, and Victoria in Q2-Q3 2021. The company is significantly increasing its production to facilitate the demand in Australia and other export markets. The company expects to receive an order of product line which includes securing an induction sealer and that might give a push to the earnings in the near term.

Key Risks: The company has operations in Canada and Australia and as such it is exposed to foreign currency risks.

Stock Recommendation: The company has reported the first sale result of medicinal cannabis products in H2FY20, which was at $1.07 million. The stock of EPN is trading below its average 52-weeks’ levels of $0.160-$0.445. The stock of EPN gave a negative return of ~25.58% in the past six months and a negative return of ~11.11% in the past one week. On a technical analysis front, the stock of EPN has a support level of ~$0.158 and a resistance level of ~$0.229. On a TTM basis, the stock of EPN is trading at an EV/Sales multiple of 4.4x, lower than the industry median (Healthcare) of 14.0x. Considering the current trading levels and valuation on TTM basis, launch of in-person Tetra clinic, expansion in production volume, appointment of Executive Management Team to enhance the business’ revenue and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.160 as on May 14, 2021.

EPN Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Note: Investment decisions should be made depending on the investors' appetite for 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.

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