AusCann Group Holdings Ltd

Releases Hard-shell Capsules: AusCann Group Holdings Ltd (ASX: AC8) is engaged in the cultivation, manufacturing and supply of medical cannabis products. As on 18^th December 2019, the market capitalisation of the company stood at $57.07 million. The company has recently announced that it has successfully completed the manufacturing and testing of its proprietary cannabinoid-based hard-shell capsules and has released them for clinical evaluation, marking a critical milestone on AC8’s road to sales. 

Successful Completion of Pilot Production of First Product Line: During FY 2019, the company made a significant R&D breakthrough with the successful completion of the product development of its final dose cannabinoid capsules. For the year ended 30 June 2019, total income of the company went up to $1.53 million from $0.28 million in FY18, which led to the fall in loss of the consolidated entity from $7.68 million to $7.64 million. The net assets of the consolidated entity increased to $41.66 million at 30 June 2019 from $14.11 million in FY18 as a result of continued operational expenditure.


Financial Performance (Source: Company Reports)

What to Expect: The company has been targeting to have the hard-shell capsules, commercially available for physicians to prescribe in Australia during 1HCY20. The focus of AC8 remains on the provision of high-quality, economical as well as clinically validated cannabis medicines, and the emphasis, in the near-term, is on progressing development and commercialisation of hard-shell capsules.

Stock Recommendation: As per ASX, the stock of AC8 gave a negative return of 28% in the last one month and is currently trading towards its 52-week low of $0.170, proffering a decent opportunity for accumulation.Over the period of FY15 to FY19, EBITDA margin and Return on Equity showed improvement and the company witnessed a CAGR of 204.53% in revenue over the same period. In terms of valuations, the stock is trading at a Price/Book multiple of 1.4x as compared to the industry median (Healthcare) of 3.2x on TTM basis. Thus, considering the current trading levels, improvement in EBITDA margin, CAGR in revenue and decent outlook, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.270, up by 50% on December 18, 2019, owing to the release of hard-shell capsules for clinical evaluation.
 

Cann Group Limited

Successful Completion of 51 Harvests: Cann Group Limited (ASX: CAN) is engaged in the cultivation of cannabis for medicinal and research purposes and the manufacturing of medicinal cannabis products. As on 18^th December 2019, the market capitalisation of the company stood at $61 million. The company has recently announced the resignation of Mr Neil Belot from the post of Non-Executive Director, effective from 14^th December 2019. The company has wrapped up 51 successful harvests at Northern and Southern facilities and it has secured manufacturing alliance with IDT Australia.

Staged Approach to Mildura facility: The company has recently announced that it plans to complete the construction of Mildura facility in stages and the company earlier intended to complete it as a single stage development. This will allow the company to build capacity on a timetable providing more certainty around capacity utilisation and reducing its initial capital investment requirements. Cann Group continued to execute on its growth strategy and generated a revenue of $4.25 million, up from $1.50 million in FY18. During FY19, the group made an operating loss of $10.93 million resulting in basic and diluted loss per share of $0.078.


Financial Performance (Source: Company Reports)

What to Expect: CAN has been assessing and testing available export pathways for medicinal cannabis product that allows it to meet domestic demand and validate the supply chain along with export procedures. CAN will establish its third-party GMP product manufacturing capability with IDT, enabling the production of value-added formulations, which can be supplied to Australian patients and to Aurora.

Stock Recommendation: As per ASX, the stock of CAN gave a negative return of 50.86% in the past one month and is trading close to its 52-week low of $0.375. Over the period of FY15 to FY19, the company witnessed a CAGR of 291.53% in revenue and a substantial improvement in net margin. During the year, current ratio of the company stood at 10.74x, higher than the industry median of 1.9x. This indicates that the company is sufficiently liquid and is capable of paying off its current liabilities using its current assets. In terms of valuation, the stock is trading at an EV/Sales multiple of 2.7x, lower than the industry median (Healthcare) of 8.1x on TTM basis. Thus, considering the current trading levels, high CAGR in revenue, improvement in net margin and valuation, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.425, down by 1.163% on December 18, 2019.

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