Elixinol Global Limited

EXL Details

Agreement to Acquire CannaCare Health: Elixinol Global Limited (ASX: EXL) is engaged in the manufacture and distribution of industrial hemp products, as well as early-stage medical cannabis. The market capitalisation of the company as on 16 March 2021 stood at ~$66.08 million. As per a recent update, the company has signed a binding agreement to acquire CannaCare Health GmbH. The acquisition will position Elixinol as a leading European CBD business. An upfront consideration of €9 million consisting of cash and equity in the form of Elixinol shares will be paid for the transaction, and a maximum earn-out of €15 million is payable upon attainment of FY21 revenues of €12.9 million.

FY20 Performance Update: The company reported a decline in revenue by ~51% to ~$15 million during the year, from a revenue of $30.8 million in the previous corresponding period. The decrease was primarily due to the exit of bulk and private label channels and the impact of the COVID-19 pandemic in key retail channels. The revenue contribution from the sale of Elixinol and Hemp Foods branded products was $13.5 million of the Group sales, representing 90% of the Group revenue. The adjusted EBITDA losses were at $22.9 million in FY20, an improvement from a loss of $24.6 million in FY19.

FY20 Revenue Performance (Source: Company Reports)

Outlook: The company believes that it is well funded to execute its business, going forward, with cash reserves of $27.7 million. Despite the challenges owing to the impact of the COVID-19 pandemic on the company’s operations, the company expects favourable results in the future with its decent distribution network.

Stock Recommendation: The company reported margin improvement in H2FY20 due to the shift in business mix towards retail and e-commerce. As per ASX, the stock of EXL is trading below its average 52-weeks’ levels of $0.140-$0.475. The stock of EXL gave a positive return of ~31.25% in the past six months and a negative return of ~14.28% in the past one month. On a technical analysis front, the stock of EXL has a support level of ~$0.159 and a resistance level of ~$0.364. On a TTM basis, the stock of EXL is trading at an EV/Sales multiple of 2.4x, higher than the industry median (Speciality Retailers) of 1.6x. Considering the valuation on a TTM basis, reduction in revenues but increase in margin performance during H2FY20, we are of the view that most of the positive factors have been discounted at current trading levels. Hence, we suggest investors to wait for a better entry-level and give an ‘Expensive’ rating on the stock at the current market price of $0.210 as on March 16, 2021.

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

Epsilon Healthcare Limited

EPN Details

Business Update: Epsilon Healthcare Limited (ASX: EPN) delivers high-quality medicinal cannabis products to its patients. The market capitalisation of the company as on 16 March 2021 stood at ~$44.75 million. As per a recent update, the company has announced that its telehealth medicinal cannabis clinic group, Tetra Health has launched its first physical clinic in partnership with Astrid Healthcare Pty Ltd. The company expects the new clinic to offer an enhanced patient experience from a quality team of healthcare professionals. The patients will be charged at a higher rate for their treatment but will have access to Medicare rebates on their treatment costs.

FY20 Results Update: The company has reported an improvement in the revenues to $7.35 million in FY20, compared to $4.79 million in FY19. There was a ~33% increase on the sale of Hydroponics equipment in Canada from the previous corresponding period, owing to product expansion in the Canadian market. In another positive development, the sales of medicinal cannabis products were realised for the first time in FY20, with a sale of $1.07 million in the six months to 31 December 2020. The company reported a total loss of $11.13 million during the period.

FY20 Financial Performance (Source: Company Reports)

Outlook: The company has undergone a name change on 25 February 2021 and has been renamed as Epsilon Healthcare Limited from THC Global Group Limited. The management believes the present name better reflects the company’s approach as a healthcare and pharmaceuticals business with investments in the medicinal cannabis space in Australia and Canada.

Key Risks: The Group is exposed to a considerable amount of credit risk within the group. It is also exposed to foreign exchange risk as it is vulnerable to fluctuations in the AUD and Canadian dollars.

Stock Recommendation:  On 17 December 2020, the company has completed a strategic placement of $2.75 million by a strategic investor along with institutional support. As per ASX, the stock of EPN is trading below its average 52-weeks’ levels of $0.180-$0.445. The stock of EPN gave a negative return of ~14.54% in the past six months and a positive return of ~2.17% in the past one week. On a technical analysis front, the stock of EPN has a support level of ~$0.187 and a resistance level of ~$0.278. On a TTM basis, the stock of EPN is trading at a P/BV multiple of 1.7x, lower than the industry median (Pharmaceuticals) of 4.2x. Considering the current trading levels, improvement in top-line, first-time sales realisation of medicinal cannabis products and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.225, down by 4.256% as on March 16, 2021.

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

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