Bet on Cronos Group’s huge cash position, PI says

With once abundant cash now at a premium in the cannabis sector investors should be looking at Cronos Group (Cronos Group Stock Quote, Chart, News TSX:CRON), says PI Financial analyst Jason Zandberg.

In a research update to clients today, Zandberg previewed CRON’s Q4 and fiscal 2019 results, which are due on February 27.

The analyst said he expects revenue will rise 46 per cent on a quarter-over-quarter basis to $18.5-million. As for EBITDA, he expects it will come in at negative $16.0-million, vs, the negative $23.9-million the company posted in Q3. Zandberg’s revenue estimate includes $14.5-million in Canadian cannabis revenue and $4.0-milion from Redwood Holdings (Lord Jones). The analyst noted his estimates exceed the street consensus on revenue (Street: $16.7-million) and EBITDA (Street: Negative $21.4-million.

“Expect revenue mainly from dried cannabis only as the sale of 2.0 products only commenced in late December,” Zanberg wrote. “Cronos has prioritized vape products following the legalization of 2.0 products last October. However, the roll out of new products ramped up in Q1 after the year end. We expect to see a small amount of vape sales in Q4 FY19 but the bulk of sales should be from pre-rolls and dried cannabis products.

Zandberg said last year’s pickup of CBD beauty products players Lord Jones may soon begin to pay off.

“Lord Jones may capture significant market share in CBD-based beauty products,” he said. Redwood Holdings subsidiary Lord Jones is one of a few emerging CBD-based beauty brands in the US. We believe CBD based beauty products provide significant upside for CRON, especially as beauty retail giant Sephora now carries Lord Jones products in 70+ retail stores.”

The PI Financial analyst also looked at other initiatives, though he said he does not expect an immediate payoff.

“In its Q3FY19 earnings press release, Cronos announced it was launching CBD tincture products in the US under the brand PEACE+ in Q4FY19. The Company will initially launch a test market of approximately 1,000 retail stores in the US through Altria’s network. We do not expect sales to be significant in Q4 but we are anticipating better colour around the initial sales and potential upside,” he added.

In a research update to clients today, Zandberg maintained his “Buy” rating and one-year price target of $17.00 on Cronos Group, a figure that implied a return of 76.7 per cent at the time of publication.

The analyst thinks CRON will post EBITDA of negative $66.7-million on revenue of $47.9-million in fiscal 2019. He expects those numbers will improve to EBITDA of positive $7.1-million on a topline of $204.4-million the following year.

“As capital dries up in the industry, we believe CRON has enough war chest of ~$1.5B to fund its operations and capital projects and further expands its market share as the market matures,” Zandberg concluded. “That said, we will be looking at cash burn to understand whether further funding will be necessary in the coming quarters/years.”