Citron Research is wrong about Cronos Group, GMP Securities says

Recent claims from a short seller against cannabis producer Cronos Group (Quote, Chart TSX, NASDAQ:CRON) are unfounded and biased, says GMP Securities analyst Martin Landry.

Shares of Cronos plunged by nearly a third Thursday after U.S.-based Citron Research, best known to Canadians as the group that unsuccessfully shorted Shopify, called the company into question in a report called “Cronos: The Dark Side of The Cannabis Space”.

“Cronos management appears to have been deceiving the investing public by purposely not disclosing the size of its distribution agreements with provinces – unlike every other major cannabis player,” the report said. “Our sources have informed us that it’s because the agreements are so small they could never justify the premium investors are paying for the stock.”

Landry counters such disclosures by other cannabis companies are in fact more problematic, since provincial supply agreements don’t involve firm commitments in the first place.

“Each province will only replenish products that are selling and hence have not made annual volume commitments given they have limited visibility as to which brands will get traction with consumers,” Landry said in a client update on Thursday. “Hence, instead of creating hype, Cronos has been prudent and refrained from disclosing volumes which may or may not materialize.”

Shares of Cronos fell almost 27 per cent on Thursday, even briefly halting trading in the stock after the Citron release. The short-seller also criticizes Cronos’ international business, citing a loss of sales in Germany as evidence. In response, Landry argues that a dip in international sales is immaterial to the company’s potential going forward and that Cronos’ position is not unusual within Canada’s fledgling cannabis sector.

“We would observe that Canadian licensed producers have had limited international exports of cannabis to date. Hence, Cronos should not be singled out as an outlier,” he says. “While Cronos’ trailing revenues may be lower than its peers, in our view, the management team has been deploying capital in an effective manner, better than some peers. The latest example is the company’s joint venture with Mucci Farms which Cronos will contribute ~$20 million of seed funding.”

Landry says Cronos management has been visible on its earnings, pointing to an announcement earlier in August involving a deal with Cura Select Canada for 20 tonnes of cannabis annually, which Landry says will bring in revenue of $60 to $80 million per year.

Below: Citron’s Andrew Left discusses Cronos Group on CNBC Thursday