Creso Pharma Limited

CPH Details

Execution of LOI with CERES: Creso Pharma Limited (ASX: CPH) develops and commercialises cannabis and hemp-derived nutraceutical, therapeutic, and lifestyle products for animal and human health. Through its wholly-owned subsidiary, Mernova Medicinal Inc. (MMI), CPH distributes dried cannabis plant retail products in Canada and overseas. As of 2^nd March 2021, the market capitalisation of the company stood at ~$208.86 million. On 1^st March 2021, CPH implemented a non-binding (“LOI”) letter of intent with CERES Natural Remedies (CNR) for the sales and distribution of CPH’s CBD and hemp animal health products anibidiol® in the US initially for one year. CPH believes this contract will add to the sales and growing revenue profile. CNR aims a target of a minimum of US$5 million sales over two years, subject to federal legalisation of CBD in the US. Due to a recent significant shift in the global regulation of cannabis and a legislative reform awaited in the US sometime during 2021, the companies will sign a formal commercial agreement on or before 1 April 2021 and intend to advance business swiftly once such legislation is in place.

FY20 Result Highlights: CPH earned a lower revenue of $2.44 million, down by 32.5% YoY in FY20 vs $3.62 million in FY19. This downfall was due to the impact of COVID-19 on the nutraceutical revenue leading to deferral of re-orders. After-tax, the loss from ordinary activities stood higher at $32.03 million, up 133% YoY on pcp basis. MMI, in its first full year of production, increased its revenues by ~$354k. It has a robust purchase order (PO) book worth $502k for Ritual Green Brand across Canada. CPH’s receipts from customers grew to $3.60 million in FY20. CPH held $6.04 million of cash and cash equivalents as of 31 December 2020.

Financial Highlights, FY20 vs FY19 (Source: Company Reports)

Key Risks: The company is exposed to the risk of developing a safe and scalable facility for cannabis production. The industry regulates every aspect of the seed-to-sale process which includes dispensing, growing, lab testing and marketing. Cannabis products pass through tests and various regulations, which may differ from state to state. CPH also witnessed the impact of COVID-19 on its business and revenue during the above reporting period.

Outlook: CPH expects to materialise additional purchase order from all provinces in Canada and customer uptake & continued repeat orders to be key revenue drivers for MMI. The company is also exploring potential licencing agreements to scale up operations. CPH plans to launch Black Mamba- a new cannabis strain, pre-roll joint range and intends to enter the emerging hash market.  

Stock Recommendation: The stock of CPH gave a positive return of 310% in the past three months and a positive return of 502.94% in the past six months. The stock is currently trading lower than the average 52-weeks price level band of $0.024 band of $0.024-$0.470. The stock of CPH has a support level of ~$0.143 and a resistance level of ~$0.268. Considering the current trading levels, higher receipts from customers and cash position in FY20 than FY19, decent outlook, growth measures planned and pipeline of purchase orders for MMI, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.205, down by 2.381% as on 2^nd March 2021.

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

CANN Group Limited

CAN Details

H1FY21 Result Highlights: CANN Group Limited (ASX: CAN) is engaged in producing and supplying medicinal cannabis in Australia and export markets. CAN has set up cultivation and research facilities in Melbourne. It is planning a cultivation facility close to Mildura, Victoria. As of 2^nd March 2021, the market capitalisation of the company stood at ~$170.97 million. For 1H21, the company reported revenues from ordinary activities of $1.1 million, up by 35.5% YoY on 1H20. It reported a loss after tax of $9.4 million for 1H21, up by 12.2% on pcp. Due to COVID-19, CAN experienced delays in permitting processes and licences for shipment of products offshore and will now ship the initial order of 25k bottles of oil will to German iuvo Therapeutics in the current quarter. During 1H21, Aurora Cannabis, a major shareholder divested its shareholding in CAN. CAN exercised 306k options at 46 cents per share during January 2021. During 1H21, CAN executed a share sale agreement (SSA) to acquire the business of Satipharm from Harvest One Cannabis Inc for CAD$4 million in an all-scrip deal. With this acquisition, CAN intends to fasten revenues, widen market reach, and strengthen the product pipeline.

During 1H21, CAN has restarted work at the Mildura site in February 2021 and raised $14.3 million via an institutional placement and $25.9 million via a share purchase plan (SPP) at $0.40 per share. It also availed a debt facility of $50 million from the National Bank of Australia for the Mildura project besides equity funding stated above. CAN held cash of $27.7 million as of 31 December 2020.

1H21 Financial Highlights (Source: Company Reports)

Key Risks: The Group faces the risk of volatility in the forecasted sale prices, feed costs, and actual production of the cannabis produce. The industry faces an evolving regulatory landscape. Hence, it faces risks of delays in seeking approvals to commence projects or cultivation facilities. The company also faces the risk of product tampering which can result in physical harm to customers and damage the group’s overall reputation.

Outlook: CAN has revised its FY21 revenue guidance to $8-10 million for full year (previous guidance was $15 million), mainly due to the timing issues and subject to the grant of necessary regulatory approvals. For the Mildura project, CAN estimates to finish commissioning of stage 1A by the end of CY2021. Satipharm estimates to generate revenue of ~$1 million for the six months to 30 June 2021 and anticipates a material ramp-up in sales henceforth. The company expects Australian partners’ orders to grow and delivery of more than 5k bottles in the current quarter.

Stock Recommendation: The stock of CAN gave a positive return of 19.60% in the past three months and a positive return of 54.43% in the past six months. The stock is currently trading slightly above the 52-weeks’ average price band of $0.610-$0.625. The stock of CAN has a support level of ~$0.442 and a resistance level of ~$0.777. On a TTM basis, the stock of CAN is trading at a price to book value per share multiple of $1.6x, lower than the industry (Healthcare) median of ~4.6x, thus seems undervalued. Considering the current trading levels, growth in top-line for 1H21, pipeline of orders from distribution partners in UK, Germany & Australia, revised modest outlook, valuation on TTM basis and associated risks of timely approvals and shipment delays due to COVID-19 restrictions, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.610, up by 1.666% on 2^nd March 2021.

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

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