Cannex is significantly undervalued, says Beacon Securities

Cannabis player Cannex Capital Holdings (Cannex Capital Holdings Stock Quote, Chart CSE:CNNX) posted positive results for its fiscal first quarter 2019, says Beacon Securities’ Doug Cooper, who in an update to clients on Wednesday reiterated his “Buy” rating and C$1.80 target price.

Vancouver’s Cannex Capital reported its fiscal Q1 2019 ended July 31, which featured revenue of $3.4 million and EBITDA of $1.8 million (all figures in US dollars unless otherwise noted).

Cannex CEO Anthony Dutton says the company’s focus on cannabis operations in Washington state is bearing fruit and that they look to expand their operations there.

“Cannex has an opportunistic view of the cannabis industry and is actively seeking the best opportunities in Washington and elsewhere to take advantage of future positive catalysts, like possible federal regulatory easing,” said Dutton in a press release. “To that end, Washington is a critical component to our long-term strategy: plentiful power and water, fantastic infrastructure and workforce and some of the world’s best farmland provide quality raw materials for future extraction and expansion.” 

Cooper says Cannex’s financials show an average monthly growth in EBITDA for the three months ended July 31 of more than 20 per cent.

“In and of themselves, these results are very positive but given the structure of the company, we believe it is important to understand the context of those results, which even tells a better story,” says Cooper.

“We believe its ‘strategic tenant,’ Northwest Cannabis, generated very strong results with revenue of ~$7.5 million, up 12 per cent from the year ago period. However, one must consider that wholesale prices in Washington dropped by ~40 per cent on a year-over-year basis. Therefore, in order to generate +12 per cent revenue growth, volume growth would have to have been ~50 per cent.”

The analyst notes that comparing Northwest Cannabis’ revenue to that from other US public companies in the space ranks Cannex sixth-largest, yet at about $120 million market cap (about 3x Northwest Cannabis’ sales), its valuation is just a fraction of those other public companies.

“This indicates to us that Cannex is very undervalued based solely on its current business,” says Cooper.

The analyst thinks CNNX will generate revenue and Adj. EBITDA in fiscal 2019 of $19.0 million and $12.9 million, respectively, and revenue and Adj. EBITDA in fiscal 2020 of $27.4 million and $16.4 million, respectively.

His C$1.80 target represents a projected return of 114 per cent at the time of publication.