Cannabis Sector Overview: The London Stock Exchange has witnessed more listing from Companies operating in the Medicinal Cannabis sector as patients seek alternate approaches to treat traditional medical conditions. In September 2020, the UK’s Financial Conduct Authority stated that UK-based ‘cannabis oil’ and medicinal cannabis with legal activities in the UK could be listed in the UK. Since then, many entities have been listed over LSE, while the large wave of IPOs can be anticipated soon.

On the other hand, the Cannabis stocks have surged since the passing of the MORE Act in the US, the market is expected to be worth approximately US$124 billion by 2028. However, the restrictive regulations could hinder the industry development. Nevertheless, the progressive Federal Government Cannabis policies can persuade UK’s legislations, provided the products meet EU GMP standards and create ample growth opportunities. Moreover, even government generates significant tax income from legal cannabis.

In the current scenario, the UK CBD industry is far from reaching its full potential due to string legislations on hemp cultivation and processing. Therefore, the large proportion of the profit going overseas. Notwithstanding, the demand for CBD products soared during the lockdown, and subsequently, the Association for the Cannabinoid Industry claims that the UK has become the world’s second-largest CBD market with the estimated sales of GBP 690 million.

Associated British Foods PLC

Associated British Foods PLC (LON: ABF) is a FTSE 100 listed Company, which is engaged in the food processing and retailing business. Under the license since 2016, ABF has been growing cannabis post phasing out its Norfolk-based tomato growing facility.

Key Dates

• On 1 July 2021, ABF is likely to release its next trading update.
• On 9 July 2021, ABF confirmed to pay the interim dividend per share of 6.2 pence on 9 July 2021 to the shareholders on the register by the close of 4 June 2021.

Investment Rationale – HOLD at GBX 2,350.00

• The reopening of Primark stores with lockdown easing and confirmation of interim dividend underpins the management confidence in the business outlook.
• In collaboration with US-listed GW Pharmaceuticals, ABF cultivates cannabis for developing drugs for selling in the US, where cannabis is legal already.
• From a technical standpoint, 50-day EMA (GBX 2,333.20) suggests an upward trend in the stock price, while the 14-day RSI (53.44) gives a neutral signal.
• From the valuation multiples perspective, all major metrics (EV/Sales, EV/EBITDA, and Price/Cash Flow) reflects an undervalued position against the Food & Tobacco industry.

Key Risks

• Delay in the UK’s lockdown easing plan with mounting Delta variant cases of the Covid-19 can worsen the cash burn on Primark stores closure.
• Fluctuations in the raw materials price and availability of operating inputs could impact the profitability of ABF.
• The recreational use of marijuana is still illegal in several countries, including the UK.

Recent News

Director Change: On 16 February 2021, ABF appointed Dame Heather Rabbatts as a non-executive director, with effect from 1 March 2021.

Financial Highlights (for the 24 weeks ended 27 February 2021, as on 20 April 2021)

 (Source: Company Website)

• Due to the trading restrictions placed on Primark, there was a significant loss of retail sales, and therefore, revenue plunged 17% during H1 FY21 on actual exchange rates (AER).
• Net finance cost was in line with the previous year; however, adjusted earnings per share declined 59% year-on-year in H1 FY21 to 25.1 pence per share.
• Higher cash generation of food business also offset the cash outflow pertaining to Primark’s stores. At the end of H1 FY21, ABF reported £705 million of net cash before lease liabilities.

Share Price Chart

   (Research done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion

ABF has already given an exceptional performance through its food processing business (including sugar, grocery, agriculture, and ingredients) during the H1 FY21. It also holds significant growth opportunities in the pharmaceutical sector if cannabis-based drugs get legalized in the UK market space as it has the largest cannabis growing site in the UK. The store-opening with lockdown easing can make Primark a cash generative venture once again and support the overall business strength. The stock made a 52-week high and low of GBX 2,528.00 and GBX 1,618.00, respectively.

Based on the strong food business, lockdown easing, consistent dividend policy, promising trends in the cannabis market, and favorable valuation conducted above, we have given a “HOLD” recommendation on Associated British Foods PLC at the current price of GBX 2,350.00 (as on 9 June 2021, at 11:20 AM GMT), when we have better clarity regarding the financial recovery when the Company increases its retail selling space.

Futura Medical PLC

Futura Medical PLC (LON: FUM) is an FTSE AIM All-Share index listed and UK-based pharmaceutical company. It develops and pharmaceutical drugs and medical devices.

On 28 June 2021, FUM would conduct its annual general meeting.

Investment Rationale – Speculative Buy at GBX 45.46

• Recent equity placing shall support the commercialisation objectives and scale up manufacturing activities to deliver long-term returns.
• The approval of MED3000 regarding the treatment for erectile dysfunction from the EU Notified Body is a transformational milestone for the Company.
• The Company has no debt on its balance sheet, reflecting a better position than the industry median.
• From a technical standpoint, 200-day SMA (GBX 30.26) is sustaining below the current market price, while the 14-day RSI (46.71) is giving a neutral signal. Therefore, an upward trend in the stock can be anticipated.

Key Risks

• It is exposed to financial risks related to fluctuations in exchange rates and interest rates besides liquidity and credit risk.
• It is still a lossmaking entity, and thus, growth prospects depend on its ability to raise funds from external sources.

Recent News

Placing and retail Offer: On 17 May 2021, FUM raised £10 million in gross proceeds to support its product launch in pipeline.

Financial Highlights (for the year ended 31 December 2020, as of 14 April 2021)

(Source: LSE Website)

• FUM did not generate any revenue in FY20. However, it made significant operational progress in MED3000.
• This lack of top-line resulted in a net loss of £2.41 million (FY19: net loss £8.92 million).
• As of 31 December 2020, the Company had cash resources of £1.02 million, post receiving £1.50 million through convertible loan notes issuance and £0.50 million through exercise of warrants during the year.

One Year Share Price Chart

(Analysis done by Kalkine Group)

Conclusion

FUM has delivered major milestones regarding the commercialization of MED3000 in China and Southeast Asia during FY20. Moreover, the Company has recently raised gross proceeds worth approximately £10 million to expand the manufacturing capabilities and fund the clinical study required for FDA regulatory submission for MED3000 as a DeNovo Medical Device. Furthermore, it had expected a final certificate of EU CE mark approval for MED3000 by May 2021. Meanwhile, the Company aims to achieve an OTC label for the regulatory submission for MED3000 in the USA by 2022. At the same time, FUM has made accelerated progress on CBD100 cannabidiol formulation as it will explore new and lucrative markets. The stock made a 52-week low and high of GBX 12.11 and GBX 84.00, respectively. On the technical chart, the next important support level is at GBX 37.28.

Based on the recent equity issuance, progress regarding the commercialization for MED3000 and improved financials, we have given a “SPECULATIVE BUY” recommendation on Futura Medical PLC at the current price of GBX 45.46 (as on 9 June 2021, at 3:45 PM GMT).

Zoetic International PLC

Zoetic International PLC (LON: ZOE) is an international CBD (cannabidiol) Company that manufactures and distributes its products across the UK, USA, and Europe.

Investment Rationale – SPECULATIVE BUY at GBX 56.84

• Zoetic operates in a high-growth sector and uniquely position to get first moved advantage through major contracts.
• The Company has a low-cost operating model to generate stakeholder returns. During H1 FY21, operating expenses were reduced by 65% year-on-year that led to a considerable reduction in loss for the period.
• On 4 May 2021, it raised £6 million through equity issuance to supplement the US rollout of Chill products and terminate the financing agreement with LDA Capital.
• From a technical standpoint, 14-day RSI (48.33) indicates an oversold signal while the stock is hovering around the lower standard deviation of the Bollinger Bands. Adjacently, the MACD line has just given a bullish crossover.
• ZOE’s stock price has yielded around 585% return over the past year, and significantly outperformed the FTSE All-Share index.

Key Risks

• CBD’s sector growth can be hindered by legislative and policy barriers.
• It is still a lossmaking entity operating in a highly regulated industry space.
• Furthermore, the growth of business is dependent on external funding, which is challenging to get amid the weak internal cash generation.

Recent News

Update on 'Chill' orders: On 17 May 2021, ZOE announced that the Company received an additional order US$1.0 million for its 'Chill' brand, demonstrating strong demand for the Company’s products.

Trading Update (as on 16 April 2021)

• Zoetic continued the US rollout since its October 2020 launch, and thus Chill products are planned to be stocked in more than 3,500 stores by July 2021.
• It also continued the momentum of new product launches across both core brands. It is likely to launch a new anti-ageing skincare cosmetic on the website soon.
• The Group was also planning to relaunch its product websites (Thechillway.com and Zoetic.com).
• With encouraging sales figure and rapidly grown physical store footprints, the Company hold high-growth opportunities.

Share Price Chart

   (Research done by Kalkine Group)

Conclusion

During H1 FY21, Zoetic delivered over 90% increase in online sales, and group gross margin was stood at 30%. By the half-year end, it also retained strong liquidity. In addition, the recent funding of £6 million can cancel the financing agreement with LDA Capital, support the US rollout of Chill products, accelerate the launch of new product, and improve the product’s website. Furthermore, the Group is trading profitably following the receipt of an additional order of US$1.0 million for its 'Chill' brand in May 2021. The stock made a 52-week high and low of GBX 109.70 and GBX 7.50, respectively. On the technical chart, the next important support level is at GBX 46.61.

Based on the recent order for Chill brands, new product launches, liquidity boost, and strong US rollout progress, we have given a “SPECULATIVE BUY” recommendation on Zoetic International PLC at the current price of GBX 56.84 (as on 9 June 2021, at 12:05 PM GMT).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV.

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