Auxly Cannabis Group (Auxly Cannabis Group Stock Quote, Chart, News TSX:XLY) has been in the penalty box for too long, says analyst Rahul Sarugaser of Raymond James, who on Monday initiated coverage of the stock with a “Strong Buy” rating and $0.60 price target.
Sarugaser said the company’s new science and consumer products focus will make it a stock you’ll want to own.
“With XLY’s very strong showing in the Cannabis 2.0 product category, along with big- league support from Imperial Brands — its freshly-engaged strategic partner and investor— we believe this company’s story is on the cusp of dramatic, positive change. Hence this initiation of coverage, hence our attention, hence our enthusiasm,” Sarugaser wrote.
Auxly is a cannabis consumer packaged goods company with three proprietary brands: Dosecann, Kolab and Foray, with a fourth, Robinsons, to be launched during the second half of this year. Last year, the company signed a $123-million deal with UK tobacco giant Imperial Brands which sees the latter gain a 19.9 per cent stake in Auxly while Auxly receives licenses for and access to IMB’s vaping research and business and becomes Imperial’s exclusive global partner in the cannabis trade.
Sarugaser says the IMB partnership gives XLY access to world-class corporate governing practices and experience in supply chain and distribution as well as business development acumen, all of which will help drive XLY’s growth in Canada, while furthering the company’s broader ambitions.
“In our view, this strategic partnership with IMB accelerates XLY’s already-sophisticated product development efforts and commercial launch in Canada, and then readies the company for broader international—particularly European—dominance,” the analyst wrote.
Auxly last reported earnings on April 29 where it showed early results in its Q4 2019 results of launching its Cannabis 2.0 products in Canada. XLY finished the quarter with $8.4 million in revenue, up from $747,000 a year earlier, and an adjusted EBITDA loss of $31.2 million.
“The biggest milestone for Auxly in 2019 was successfully achieving our goal of launching our incredible suite of branded cannabis products into the Cannabis 2.0 market on the first day that those products were legally permitted in Canada,” said CEO Hugo Alves in the Q4 press release.
Sarugaser said Auxly has impressed right out of the gate on derivatives, where he noted that the company’s products accounted for 34 per cent of all Cannabis 2.0 SKUs (and 69 per cent of all edible SKUs) available in the Ontario Cannabis Store on the first day of derivatives sales in the province.
Sarugaser’s thesis on Auxly rests on three pillars: Cannabis 2.0 dominance powered by rigorous science, having a giant tobacco partner in IMB and the company’s high torque which was on display in XLY’s “powerful revenue story [which] begins in Q1 2020,” Sarugaser said. “Be ready.”
Looking ahead, the analyst is forecasting fiscal 2020 revenue and EBITDA of $59 million and negative $51 million, respectively, and fiscal 2021 revenue and EBITDA of $108 million and negative $39 million, respectively. At the time of publication, Sarugaser’s $0.60 target represented a projected 12-month return of 81.8 per cent.