Canopy Growth Corp

Canopy Growth Corp (NASDAQ-GS: CGC) is a multi-brand cannabis Company based out of Canada. The Company through its subsidiaries is engaged in the business of production and sale of legal marijuana in medical market.

Investment Highlights - Canopy Growth Corp – Avoid at USD 35.25

• Despite the higher revenue in Q3 FY2021, the profitability margins remained impacted by higher expenses.
• In the last one month, the Company delivered a negative return of ~12.03% and delivered lower returns compared to the benchmark Index.
• As per valuation metrics, the EV/Sales multiple of Canopy Growth Corp is currently higher as compared to the corresponding multiple of the Pharmaceuticals industry, reflecting overstretched valuations.
• From the technical standpoint, 90-day RSI is supporting downward movement (around 53 level), which means the stock price could decline in the short term.

Key Risks

• The outbreak of Covid-19 pandemic resulted in disruption in financial markets, world economy, regional economies and supply chain, which impacted negatively on the financial and operational performance.
• Any change in regulations and government policies could affect the overall business of the Company.

Recent News

On 2 March 2021, Canopy Growth has launched the a premium ready-to-drink CBD-infused sparkling water, Quatreau in the US CBD beverage category.

Financial Highlights – Q3 and 9M FY2021 (31 December 2020) (released on 9 February 2021)

(Source: Quarterly Report, Company Website) 

• In the third quarter and nine months of the financial year 2021, driven by higher revenue form B2B, Canadian and International businesses, the net revenue increased to CAD 152,528 thousand and CAD 398,210 thousand, respectively.
• Driven by higher operating expenses, the profitability for the period declined. The Company reported higher net loss of CAD 829,251 thousand and CAD 1,054,125 thousand in Q3 and 9M FY2021, respectively.
• The cash balance as on 31 December 2020 declined to CAD 824,960 thousand (31 March 2020: CAD 1,303,176 thousand).

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The Company has shown a decline in financial performance in the third quarter and nine months period of the financial year 2021. Despite the higher revenue, the bottom-line performance declined, while profitability margins remained in the negative zone. The liquidity position for the period declined and CGC has reported a poor balance sheet. Due to the covid-19 pandemic, the Company has witnessed an increase in selling and marketing expenses and also face disruption in the supply chain. The stock made a 52-week low and high of USD 9.00 and USD 56.50, respectively.

Based on the above rationale, we have given an “Avoid” recommendation on Canopy Growth Corp at the closing price of USD 35.25 (as on 2 March 2021), and with support from few catalysts needs to be evaluated at a later stage such launch of Quatreau in the US market.

Aphria Inc

Aphria Inc (NASDAQ-GS: APHA) is a premier cannabis Company. It is engaged in the business of producing high-quality cannabis using greenhouse and commercial agriculture expertise.

Investment Highlights - Aphria Inc – Avoid at USD 18.95

• The Company has shown a decline in financial performance in H1 FY2021 and need to manage its operating expenses more effectively unless it will increase loss in the near future.
• The Company has reported a negative ROE (Return on Equity) of 6.5% in Q2 FY2021, which is lower than the industry median. The ROE remained in the negative zone for last 2 years.
• As per valuation metrics, the EV/Sales multiple of Aphria Inc is currently higher as compared to the corresponding multiple of the Pharmaceuticals industry, reflecting overstretched valuations.
• From the technical standpoint, 14-day RSI is supporting downward movement (around 51 level), which means the stock price could decline in the short term.

Key Risks

• The Company operates in challenging market conditions which may impact the operation performance and reduce financial performance.
• The business of the Company is affected by a change in government policies  and regulations.

Financial Highlights – Q2 and H1 FY2021 (30 November 2020) (released on 14 January 2021)

(Source: Quarterly Report, Company Website) 

• In the second quarter and first half of the financial year 2021, driven by higher net cannabis revenue and net beverage alcohol revenue, the total revenue increased to CAD 160,532 thousand and CAD 306,221 thousand in Q2 and H1 FY2021, respectively.
• The profitability margins declined significantly for the period, reflecting higher cost of goods sold and operating expenses.
• The Company has a strong cash and cash equivalents of CAD 187,997 thousand as on 30 November 2020 (31 May 2020: CAD 497,222 thousand).

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The Company has shown a significant decline in the financial performance in the second quarter and first half of the financial year 2021. Despite the higher revenue, the Company reported a higher net loss. APHA managed to improve its liquidity position and reported a well-positioned balance sheet. The Company through launch of new products is looking to grow market share in Canadian Market. In International markets, the Company remained focused on business activities to deliver ROI (return on investment) without being capital intensive. The Company’s operations were significantly impacted by the covid-19 pandemic as it resulted in a significant increase in expenses. The stock made a 52-week low and high of USD 1.95 and USD 32.29, respectively.

Based on the above rationale, we have given an “Avoid” recommendation on Aphria Inc at the closing price of USD 18.95 (as on 2 March 2021), and with support from few catalysts needs to be evaluated at a later stage such benefit of improved liquidity position.

Zynerba Pharmaceuticals Inc

Zynerba Pharmaceuticals Inc (NASDAQ-GM: ZYNE) is a clinical-stage specialty pharmaceutical company focused on the development of transdermal cannabinoid therapies used for rare and near-rare neuropsychiatric disorders.

Investment Highlights - Zynerba Pharmaceuticals Inc – Hold at USD 4.68

• The Company remained in the development stage and did not generate any revenue in Q3 FY2020 and 9M FY2020, and profitability remained in the negative zone.
• In the last six months, the Company delivered a substantial return of ~23.48% and delivered higher returns compared to the benchmark Index.
• As per valuation metrics, the Price/Earnings multiple of Zynerba Pharmaceuticals Inc is currently lower as compared to the corresponding multiple of the Biotechnology & Medical Research industry. It reflects, shares are undervalued as compared to the industry.
• From the technical standpoint, 14-day RSI is supporting an upside move (around 45 level), which means the stock price could increase in the short term.

Key Risks

• The Company also faces stiff competition from peers which could result in a decline in the market share.
• The Company has been carrying the burden of operational inefficiency for the past numerous quarters.

Financial Highlights – Q3 and 9M FY2020 (30 September 2020) (released on 9 November 2020)

(Source: Quarterly Report, Company Website) 

• For the third quarter and nine months period of FY2020, the Company did not generate any revenue and witnessed an increase in expenses for the period.
• Due to higher expenses, the loss for the period increased to $9,048,531 and $41,719,121 in Q3 and 9M FY2020, respectively.
• The cash balance as on 30 September 2020 declined to $64,311,205 (31 December 2019: $70,063,242).

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The Company has shown a decline in financial performance in the third quarter and nine months period of the financial year 2020. The Company is in the development stage and hence rely on grants and cash balances to carry on all the business activities. The operations are financed by the sale of equity securities by private placements. The Bottom-line performance has declined, while profitability remained in the negative zone and generated negative cash flow from operations. Zynerba Pharmaceuticals operations are impacted by the outbreak of the covid-19 pandemic and have been focusing on strengthening its balance sheet and reducing its costs to preserve cash. Despite the impact of covid-19 on world economy, the Company is focused on driving growth across platform and executing business objectives. The stock made a 52-week low and high of USD 2.55 and USD 9.00, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” recommendation for Zynerba Pharmaceuticals Inc at the closing price of USD 4.68 (as on 2 March 2021) and will recommend fresh buying at the right time.

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