Auxly Cannabis is cleaning up in vapes and edibles, says Raymond James

Cannabis CPG company Auxly Cannabis Group (Auxly Cannabis Group Stock Quote, Chart, News TSXV:XLY) is owning the Canadian vapes and edibles markets from the get-go, says Raymond James analyst Rahul Sarugaser, who delivered a report to clients on Tuesday and reaffirmed his “Strong Buy 1” rating for Auxly.

The Ontario Cannabis Store (OCS) released its year-end report on Monday for the period between April 1, 2019, and March 31, 2020, with plenty of data to dig into for a glimpse at how the Canadian pot marketplace fared over this first stretch of legalization.

After a slow start, Ontario opened up rapidly over the past 12 months, with the provincial government moving from a lottery system for awarding retail licenses to an open licensing process. Supply concerns also dogged the Ontario and Canadian markets, while COVID-19 has brought its own challenges and opportunities for cannabis, which went from illegal to an essential service in less than two years.

“While growth forecasts for the 2020–2021 fiscal year are challenging given the current operating environment, I believe the legal cannabis marketplace will continue to demonstrate growth. Increased access points, a maturing product offering and an increasingly enthusiastic response from consumers bode well for Ontario,” wrote OCS president Cal Bricker in the report.

As for Auxly —which has brands like Dosecann, Kolab and Foray in the cannabis derivatives (rec, wellness and medicinal) markets, along with an investment from UK tobacco giant Imperial Brands, making Auxly the exclusive global cannabis partner for Imperial— the OCS report showed the company ranking well within the edibles and Vapes categories, both at the online OCS and at retail stores in the province.

Auxly’s Foray brand finished third for the year in edibles at the online OCS with an 18 per cent market share compared to 27 per cent for Aurora Drift and 20 per cent for Bhang, while in vapes, Auxly’s Kolab Project finished fourth with eight per cent of the market.

At the retail outlets, Foray came in second in edibles with 21 per cent of the market, while Kolab and Foray finished fourth and fifth, respectively, in vapes at seven and six per cent of the market, respectively.

On the results, Sarugaser said they speak of a smaller company besting its bigger and more well-heeled peers in derivatives.

“XLY continues to punch above its weight among multi-billion dollar market cap competitors in the Cannabis 2.0 arena,” Sarugaser wrote. “As we outlined in our initiation of coverage report, XLY’s 1Q20 earnings, which reflected some of these sales, revealed that the company had posted the highest Cannabis 2.0 sales of all Canadian cannabis companies, with more than $8.0 million in net sales (>$9.0 million in total net cannabis sales).”

“XLY, with its $220 million market cap, is beating out competitors with 10-40x the valuation market cap in some of the most important categories,” Sarugaser said. “We believe the market is materially undervaluing XLY’s outsize performance here, and completely forgetting about the company’s key empowering partnership with tobacco and vape IP giant Imperial Brands.”

Sarugaser is forecasting fiscal 2020 revenue and EBITDA for Auxly of $59 million and negative $51 million, respectively, and for fiscal 2021 revenue and EBITDA of $108 million and negative $39 million, respectively.