Stocks’ Details

Cann Group Limited

Capital Raising to Support Near-Term Growth Strategy: Cann Group Limited (ASX: CAN) is engaged in the cultivation of cannabis for medicinal and research purposes and manufacturing of medicinal cannabis products. The market capitalisation of the company stood at ~$143.09 million as on 29^th December 2020. Recently, the company notified the market that it has finished the first shipment of medicinal cannabis oil to UK distribution partner Astral Health Ltd. During the quarter ended 30^th September 2020, the company concluded a capital raising of $40.2 million, which was comprised of institutional placement of $14.3 million and a $25.9 million share purchase plan to existing shareholders. The company would use these funds to support its near-term growth plans and the staged construction of the Mildura cultivation facility. Net cash outflow from the operating activities stood at ~$5.9 million and $216 k from investing activities.

Cash Flow Summary (Source: Company Reports)

Outlook: For the upcoming quarter, the company’s priority revolves around working closely with new offtake customers for finalizing their specific product and volume requirements and complete related regulatory approvals.

Stock Recommendation: CAN has executed final documentation for the debt facility of $50 million with National Australia Bank (NAB). The amount would be utilized to complete the first stage of its state-of-the-art medicinal cannabis production site near Mildura. The company closed September 2020 quarter with cash and cash equivalents of ~$33.76 million. In the last six months, the stock of CAN has corrected 24.69%. CAN has EV/Sales multiple of 18.3x as compared to the industry average (Pharmaceuticals) of 49x on TTM basis. In addition, the stock is trading at a price to book value multiple of 2.3x against the industry average (Pharmaceuticals) of 9.8x on TTM basis. Thus, it seems that the stock is undervalued at current trading levels. On a technical front, the stock has a support level of ~$0.3 and a resistance level of ~$0.994. Therefore, considering the recent capital raising, first shipment of medicinal cannabis oil, decent outlook and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.615 per share, up by 16.073% on 29^th December 2020.

Creso Pharma Limited

Expansion into Canadian Market: Creso Pharma Limited (ASX: CPH) is involved in developing, registering and commercialising pharmaceutical-grade cannabis and hemp-based products. The market capitalisation of the company stood at ~$126.90 million as on 29 December 2020. Following a comprehensive review of the significant market opportunities available in Canada as well as positive customer feedback regarding Mernova’s current product range, the wholly-owned Canadian subsidiary, Mernova Medicinal Inc. of CPH has decided to expand its current operations and target the Canadian Hash market. During the September 2020 quarter, Mernova Medicinal Inc generated A$596k of total sales revenue. In addition, the company’s Nutraceutical Product Line - cannaQIX® has inked an agreement with DHS Business/Lisbon for rolling out CPH’s products into Portuguese and Spanish markets, which is supporting the company’s international expansion. CPH recorded a cash outflow of $1.9 million from operating activities.

Cash Flow Summary (Source: Company Reports)

Outlook: The company’s recent strategic Board and Management changes improve the company’s strategy for near-term growth.

Stock Recommendation: During the September 2020 quarter, the company raised A$7.992 million via a share placement to professional, sophisticated and institutional investors. As a result of this, the company has strengthened its balance sheet and cash position. CPH ended the quarter with cash reserves of A$2.56 million. The stock of CPH has surged 442.85% and 400% in the last one and three months, respectively. CPH has an EV/Sales multiple of 31.3x as compared to the industry median of 17.7x (Pharmaceuticals) on TTM basis. In addition, the stock is trading at a price to book value multiple of 19.5x against the industry average of 9.8x on TTM basis. Thus, it seems that the stock is overvalued at the current trading level. On a technical front, the stock has a support level of ~$0.102 and a resistance level of ~$0.472. Hence, in light of steep price movement in past few months and higher valuation, we are of the view that most of the positive factors are discounted at current trading level and give an “Expensive” rating on the stock at the current market price of $0.190 per share, up by 5.555% on 29 December 2020.

Medlab Clinical Limited

A Quick Update on Clinical Program: Medlab Clinical Limited (ASX: MDC) is involved in nutritional pharmaceutical research and development. The market capitalisation of the company stood at ~$67.12 million as on 29 December 2020. Recently, the company provided an update on its clinical and pre-clinical programs, wherein, it stated that it has achieved strong progress in NanoCelle® development. The company has also successfully demonstrated that NanoCelle® can adsorb a nanoparticle compound onto a textile.

Achievement of Milestone: During the September 2020 quarter (Q1 FY21), the company has inked an agreement with leading global CRO George Clinical Pty Ltd in order to provide clinical services support to its upcoming NanaBis™ Phase III trials. The company sold 1,473 units during the quarter, reflecting a rise of 29% on a YoY basis. During Q2 FY20, MDC witnessed supply issues for NanaBis™, which left a short-term impact on the momentum of prescribed use under the Special Access Scheme (SAS). During Q1 FY21, the company reached the milestone of 10,000-unit product sale under the SAS.

Unit Sales (Source: Company Reports)

Outlook: The company is expecting to receive NRGBiotic™/Depression and MultiBiotic™/Chemotherapy study results in Q1 CY21. The company’s priorities include expansion of NanaBis™ in the US going forward.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As on 30^th September 2020, the cash balance of the company stood at $8.38 million, which included the Share Purchase Plan of $1.57 million before costs.  The stock of MDC is trading below its 52-week low-high average of $0.257. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price, which is offering an upside of low double-digit (in percentage terms). On a technical front, the stock has a support level of ~$0.123 and a resistance level of ~$0.296. Thus, considering the decent growth in the product sale, decent outlook, current trading level and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.245 per share, up by 2.083% on 29 December 2020.

THC Global Group Limited

Completion of Placement: THC Global Group Limited (ASX: THC) is a Farm to Pharma diversified vertically integrated cannabis company that owns the largest bio-pharma manufacturing facility in the Southern Hemisphere. The market capitalisation of the company stood at $44.52 million as on 29 December 2020. On 17^th December 2020, the company announced that it has wrapped up a strategic placement and raised $2.75 million via the issue of 11 million shares at $0.25 per share. This capital raising indicates strong support for new corporate strategy and repositioning the business towards high-value pharmaceutical manufacturing and healthcare.

Decent Growth in Revenue: For the quarter ended 30^th September 2020 (Q3 FY20), the company recorded continued revenue growth. In addition, the company experienced strong results from its Canadian hydroponics and cultivation solutions business and Australian telehealth clinic business, Tetra Health. During Q3 FY20, the company’s Canadian operation reported revenue amounting to C$4.54 million, which surpassed the total revenue of FY19. This indicates robust recovery from the pandemic related to supply and sales issues experienced earlier in 2020. The company recorded cash receipts of $2.12 million from customers.

Cash Position (Source: Company Reports)

Outlook: The company is under the process to change its name to Epsilon Healthcare Limited, and for that, it is seeking approval of shareholders in general meeting, which has been scheduled to conduct in January 2021. In addition, the company is well-positioned to become a globally significant exporter of TGA and EU GMP medicinal cannabis medicines.

Stock Recommendation: The company closed the quarter with cash reserves of $7.26 million. The stock of THC has corrected 4.08% and 14.54% in the last three and six months, respectively. As a result, the stock is trading towards its 52-week low level of $0.180, offering decent opportunity for accumulation. On a TTM basis, THC has EV/Sales multiple of 6.6x, which is lower than the industry median (Pharmaceuticals) of 17.7x. In addition, the stock is trading at a price to book value multiple of 1.7x against the industry median (Pharmaceuticals) of 3.7x on TTM basis. On a technical front, the stock has a support level of ~$0.202 and a resistance level of ~$0.326. Thus, considering the decent growth in revenue, recent capital raising, current trading level and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.235 per share on 29^th December 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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