Auxly Cannabis has a huge upside, says Mackie Research

Auxly Cannabis Group (Auxly Cannabis Group Stock Quote, Chart TSXV:XLY) reported a larger than expected net loss over its first quarter and the company has experienced delays in getting its extraction facility operational, but Mackie Research analyst Greg McLeish is holding steady on the stock.

In a client update on Tuesday, the analyst reiterated his “Buy” recommendation and $1.75 target price, which represented a 12-month projected return of 113.4 per cent at the time of publication.

Toronto-based Auxly Cannabis reported its first quarter fiscal 2019 results on Monday, coming in with revenue of $817,000 and a net loss of $13.8 million. That compares to McLeish’s estimates of $225,000 and $9.4 million, respectively. The analyst says that the higher than forecasted net loss was primarily attributable to slightly higher SG&A expense and higher share based compensation expense ($3.0 million compared to his forecast of $875,000). McLeish says the company ended Q1 with a strong balance sheet with $165 in cash and cash equivalents, the majority of which is earmarked for funding its greenhouse joint venture in Leamington, Ontario, where phase one is currently under construction and the first cultivation is expected in Q2 of 2020.

“During 2018, Auxly focused its efforts on accelerating market participation by investing in cultivation opportunities, or ‘streaming partners.’ Today, these partnerships remain important to the company’s operations by providing a secure and cost-efficient source of raw cannabis. However, in light of Canada’s upcoming legalization of cannabis derivative products, the company has been focused on developing innovative derivative branded products. Auxly is also looking to leverage strategic distribution channels amongst proprietary medical channels and retail outlets, and is focused on additional opportunities for growth internationally,” says McLeish.

The analyst says Auxly is refining its strategy to focus on product development and distribution and that the company’s new approach has four main components, viz., cultivation, product development, distribution and international operations.

The aforementioned delays in its extraction facility are cause for a lowering of McLeish’s forecast which now calls for 2019 revenue and EBITDA of $8.5 million and negative $37.9 million, respectively, and 2020 revenue and EBITDA of $249.3 million and $85.4 million, respectively.