Now’s a good time to buy Auxly Cannabis, says Raymond James

Share price weakness for cannabis CPG company Auxly Cannabis (Auxly Cannabis Stock Quote, Chart, News TSXV:XLY) is out of step with what the name has to offer, says Raymond James analyst Rahul Sarugaser, who on Monday delivered an update to clients on the company.

Sarugaser reiterated his “Strong Buy” rating, saying the stock’s current position at a two-year low
makes for a good entry point.

Toronto-based Auxly, which operates as a consumer packaged goods company in the cannabis space, has products for the medical, wellness and recreational markets and has a strategic partnership with UK tobacco giant Imperial Brands.

The company announced on Monday that its 51-per-cent-owned joint venture Sunens has secured a cultivated license from Health Canada for the first phase of its 1.1-million sq. ft. greenhouse facility in Leamington, Ontario, with the first phase including about 360,000 sq. ft. of licensed cultivation, processing and storage space.

Auxly reported that Sunens has a diverse genetic library of over 200 unique cannabis strains and that the operational facility will now begin cultivating high-quality organic cannabis within the licensed areas.

Auxly CEO Hugo Alves said the Health Canada license represents another key milestone for his company.

“The speed with which the joint venture project has been developed, constructed and licensed relative to its peers is a testament to the hard work and dedication of a very focused and capable team,” Alves said in a press release. “Sunens will provide Auxly with a consistent, high-quality and cost-effective source of organic cannabis, giving us greater traceability and flexibility in the development and manufacturing of our branded products.”

Looking at the numbers for the facility, Sarugaser estimated a potential yield of up to 18,000 kg of cannabis a year, which if all sold as flower would have a value of about $50 million, while the analyst contends Auxly is likely to use the low-cost biomass secured through its Sunens offtake agreement to go towards its Auxly’s Cannabis 2.0 program, converting it to higher margin edible, vape and beverage products.

“XLY’s stock has slipped ~20 per cent over the last two weeks versus the HMMJ Index down 2 per cent, and — other than the COVID-related market crash in mid-March — is trading near its two-year low. In our view, this weakness is disconnected from the company’s solid fundamentals, and we maintain our long-term conviction in the stock based on XLY’s deft focus on high-margin Cannabis 2.0 products and its flagship partnership with international tobacco giant Imperial Brands. We reiterate our Strong Buy (1) rating, and view this as a good entry point,” Sarugaser wrote.

Looking ahead, the analyst thinks Auxly will generate 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.

XLY is down 38 per cent for 2020 and down 55 per cent over the past 12 months.