Zoetic International PLC

Zoetic International PLC (LON: ZOE) is the London-listed vertically integrated CBD (cannabidiol) Company.

Investment Rationale – Expensive at GBX 42.38

• The Company has been reporting losses for the past five years, whereas the industry has been delivering positive fundamentals.
• The stock is trading close to a 52-week high while RSI-14 (86.74) giving the overbought signal, a short-term correction in price can be expected.
• The Company is going through a transition period, and it can fail to obtain the necessary licenses, permits or approvals.

Risk Assessment

• The limitation placed on cross-border trade amid Covid-19 outbreak can have a direct impact on cash flows and supply chain.
• There is an inherent risk of product liability claims as products will be sold to consumers directly, and hence, it can cause serious regulatory action and litigation.
• The CBD industry is quite competitive and evolving, and it can face pressure over margins.

Recent News:

2 September 2020: The Company announced the disposal of its stake in Colorado-based oil and gas assets and continued focus on its core CBD business. Following the sale, the Company has no borrowing as Bank loan of US$276,574 from ANB Bank is now fully paid.

Financial Highlights (for the year ended 31 March 2020, as on 30 September 2020)

(Source: Company Website)

• Despite the economic challenges, the Company laid the framework as a CBD pioneer in FY20 and focusing on bringing products to new markets across the globe.
• It has successfully exited from the volatile natural resources sector post disposal of its assets in East Denver and Kansas.
• The CBD market continues to grow, and the Company is in a prime position to establish itself as an industry leader.
• During FY20, the primary source of revenue shifted to CBD products from the sale of oil and gas.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

Post the strategic exit from legacy operations, the Company has bandwidth and resources to pursue the potential of its CBD activities. The CBD business is expected to be cash positive in the near-term as its brands gain market share. As per Brightfield Group, the sale of CBD is forecasted to surpass $23 billion in market size in the US. In a nutshell, Zoetic is operating in the fast-growing industry with numerous opportunities. However, the Company is in a transition phase and reporting losses, while it has already touched 52-week high. The product recalls due to unintended harmful effects and economic uncertainties can put pressure over the upside potential of the stock. Stock 52 week High and Low were GBX 42.85 and GBX 2.56, respectively.

Therefore, based on the overstrained prices, and overvalued trading multiples, we have given an “Expensive” stance on Zoetic International at the current price of GBX 42.38 (as on 8 October 2020, before the market close at 8:40 AM GMT+1), while we will watch how strategic initiatives will gain traction in the near term or if we can get a rational price to invest in this growth stock.

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