Auxly Cannabis has 131 per cent upside, says Raymond James

Expect a drop in sales from Auxly Cannabis (Auxly Cannabis Stock Quote, Chart, News TSXV:XLY) in its upcoming quarterly financials. That’s according to Raymond James analyst Rahul Sarugaser who in a report to clients last Friday dropped his rating on the stock from “Strong Buy 1” to “Outperform 2,” arguing that the company’s prospects in the cannabis market still look good.

Toronto-based Auxly is a cannabis CPG company with a strategic partnership with UK tobacco giant Imperial Brands. The company announced on Monday that its premium small-batch cannabis under the name Robinsons is now available in Ontario and Nova Scotia cannabis shops.

“I believe that Robinsons is growing some of the best cannabis in Canada and I am very excited and proud that we are bringing it to the market,” said Hugo Alves, Auxly CEO, in a press release. “Ontario and Nova Scotia are just the beginning, and we look forward to sharing Robinsons with discerning consumers in other provinces in the coming months.”

Auxly, which is expected to report its second quarter 2020 results during the week of August 10, posted net revenues of $9.9 million in its previous quarter (ended March 31, 2020), with vape product sales showing strong growth. At the time, the company’s Q1 $10-million top line beat analysts’ consensus expectation of $7.8 million while the EBITDA loss of $8.2 million was also much better than the Street’s loss of $10.5 million.

But for the upcoming Q2 2020, Sarugaser is expecting a drop in sales which he attributes to greater competition along with greater supply in Canada’s newly-minted derivatives market.

“While XLY was fast out the gate with its Cannabis 2.0 offering in 1Q20, our channel checks have revealed that 2Q20 included mounting competition from several incumbents, specifically in the C2.0 segment of the Canadian adult-use cannabis market. Due to this, combined with the fact that provincial distributors have been reducing their days of inventory on-hand, we anticipate a brief, one quarter dip in revenue for XLY,” Sarugaser wrote.

For the second quarter, Sarugaser is calling for revenue of $8.7 million and an EBITDA loss of $9.8 million.

On Auxly’s longer-term prospects, the analyst wrote, “We continue to have conviction that with its focus on Cannabis 2.0 — punching well above its weight in edible and vape categories, and growing capabilities in the ultra-premium segment of the market with its Robinson's brand — supported by its heavyweight partner, Imperial Brands (IMB, not covered), XLY should manage to capture growing market share from its current ~1.5 per cent to 7 per cent through 2024. This drives our net revenue estimates of $38.9 million
for 2020, growing to $70.1 million in 2021, and ~$370 million in 2024.”

Along with the $39-million revenue forecast expected in 2020 (previously $59 million), Sarugaser is calling for an EBITDA loss of $37 million (previously $51 million).

With the update, Sarugaser is maintaining his target price of $0.60 per share, which at press time represented a projected 12-month return of 131 per cent.