Elixinol Global Limited

EXL Details
 
Non-Renounceable Pro Rata Entitlement Offer: Elixinol Global Limited (ASX: EXL) is engaged in the manufacturing and distribution of industrial hemp products. As on 12 May 2020, the market capitalization of the company stood at $65.5 million. The company has recently announced a non-renounceable pro rata entitlement offer of 1 new fully paid ordinary share for every 2.51 ordinary shares to raise up to $11.0 million and has dispatched the retail entitlement offer booklet. The proceeds from the entitlement offer will support operating cash flow, consumer brand building and distribution build.

Sale of Nunyara Land: The company has announced the sale of the land owned by Nunyara Pharma Pty Ltd to a private individual for a consideration of $2.56 million. The company intends to use these proceeds to support Elixinol’s branded CBD nutraceuticals strategy. The company has recently announced that the class action suit against Elixinol, LLC has been withdrawn, indicating that the company’s products are accurately labeled. 

Financial Performance (For the Period Ended 31 March 2020): During the first quarter ended 31 March 2020, the company reported a 25% decline in revenue to $3.3 million. This was mainly due to the status of the US CBD market, e-commerce disruptions and COVID-19 impacts across all channels. In the same time span, headcount reduction and reduced raw material purchases resulted in a reduction in the cash burn by approximately 17%. The outbreak of COVID-19 has resulted in delays in securing new distribution points within Elixinol’s bricks and mortar sales channel and hence have slowed the rate of sale. 


Revenue by Chanel (Source: Company Reports)

Future Expectations and Growth Opportunities: The company is building a global Elixinol branded CBD nutraceuticals business to enhance margins. It has a continued focus on reducing cash-burn and working capital initiatives and is aiming to reach the break-even point. The future profitability of the company is contingent on consumer uptake, the results of further research and clinical trials, general economic conditions, the level of competition in the industry and regulatory factors. EXL has an increased emphasis on compliance and is on the path towards positive cash flow and improved gross margins.

Stock Recommendation: As per ASX, the stock of EXL gave a negative return of 5.11% on YTD basis but a positive return of 46.76% in the past one month. During FY19, gross margin of the company witnessed an increase over the previous year and stood at 58.3%, up from 54.3% in FY18. In the same time span, net margin and ROE of the company witnessed a substantial decline. On TTM basis, the stock is trading at an EV/Sales multiple of 1.7x, higher than the industry average (Specialty Retailers) of 1.2x. The stock is, however, trading at attractive levels given the recent plunge in the financial markets but looks overvalued on the basis of valuation. Considering the volatility in returns, softer market conditions due to the global pandemic and higher EV/Sales multiple, we have a watch stance on the stock as we would seek more visibility on the viability of the business. The stock is currently trading at $0.315, down by 33.684% on 12 May 2020, owing to its recent update regarding the retail entitlement offer.

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

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