Buy Auxly Cannabis for a double, Mackie Research says

Mackie Research analyst Greg McLeish is staying bullish on cannabis sector play Auxly Cannabis (Auxly Cannabis Stock Quote, Chart TSXV:XLY) after the company’s full 2018 results. On Monday, McLeish provided an update to clients which reiterated his “Buy” rating with the reduced target price of $1.75 (was $3.00).

On March 29, Vancouver-based Auxly reported its fourth quarter and full year 2018 financials, coming in with $747,000 in total revenues and a net loss of $67.2 million.

CEO Chuck Rifici said 2018 was an important year for Auxly in its overall plan to become a vertically integrated cannabis company.

“We were successful in building a diverse and robust cultivation pipeline, have made progress on adding value through the research and development of derivative cannabis products through Dosecann, and expanded our distribution channels for bringing cannabis products to market. We added key strategic assets and partnerships to our portfolio, have over $200 million of cash and cash equivalents, and are well positioned to execute on our objectives for this year,” says Rifici in a press release.

McLeish says that while Auxly spent its 2018 on accelerating market participation by investing in cultivation opportunities, the company is also focusing on developing innovative derivative-branded products and leveraging distribution channels among proprietary medical channels and retail outlets, along with looking into opportunities for international growth.

“In light of Canada’s upcoming legalization of cannabis derivative products, the company has refined its strategy to secure the infrastructure and expertise needed to develop competitive derivative branded products. Through its wholly-owned subsidiary, Dosecann, the company is developing novel edible & concentrate products for sale in both medical and recreational markets. Dosecann holds a Standard Processing License as well as an Analytical Testing License, and owns one of Canada’s largest cannabis extraction, manufacturing and R&D operations, a 42,000 ft2 facility in Charlottetown, PEI,” says McLeish.

The analyst notes that the company has a strong balance sheet, ending 2018 with $212.0 million in cash and cash equivalents, with the majority of the cash earmarked for its large-scale venture in Leamington, Ontario, Sunens Farms, which management predicts will deliver approximately 100,000 kg of cannabis starting in 2020.

The analyst is calling for 2019 revenue and EBITDA of $16.0 million and negative $40.6 million, respectively, and 2020 revenue and EBITDA of $245.7 million and $85.0 million, respectively. His $1.75 target comes from applying a 12x EV/EBITDA multiple to his 2021 estimate and discounting the result using a ten-per-cent rate. The target represented a projected 12-month return of 108.3 per cent at the time of publication.