Raymond James raises rating on Avicanna

Raymond James analyst Rahul Sarugaser has raised his rating on cannabis play Avicanna (Avicanna Stock Quote, Chart, News TSX:AVCN) after the company’s latest quarterly results.

In a company comment to clients Monday, Sarugaser said Avicanna should hit an inflection point over the second half of 2020 and into 2021.

Toronto-headquartered Avicanna has a partnership with El Grupo Daabon, a global organic agriculture power, to cultivate high-quality, low-cost hemp and cannabis in northern Colombia. The company currently sells cannabis APIs (active pharmaceutical ingredients) under its Aureus brand, CBD products under Pura Earth and THC products under Rho Phyto. Avicanna also has clinical assets, including one to be evaluated in the context of dystrophic epidermolysis bullosa.

Avicanna reported its second quarter financials on Monday, posting revenue of $709,468 compared to $260,903 for the previous quarter and an EBITDA loss of $2.5 million.

Over the quarter, Avicanna launched its Rho Phyto brand through Medical Cannabis by Shoppers, a subsidiary of Shoppers Drug Mart and the largest pharmacy chain in Canada "We continued to make strategic, scientific and commercial progress during the quarter while optimizing our global operations, which is demonstrated through quarter to quarter revenue increases and cost reductions,” said CEO Aras Azadian in a press release. “We are at an inflection point where our differentiated and advanced product lines are commencing sales in major markets and we are demonstrating evidence of our diversified business model which is comprised of  seeds, API, advanced finished products, and royalties from intellectual property.”

Over the quarter, Avicanna also closed a non-brokered private placement for about $2.56 million, issuing 3.2 million units at $0.80 per unit.

On the Q2 results, Sarugaser said AVCN registered slight top and bottom line beats of his estimates, with the $0.71 million in revenue coming ahead of his $0.50 million and the EBITDA loss of $2.5 million being a little better than his negative $2.8 million prediction.

In his report, Sarugaser said Avicanna should see an uptick in revenue over the second half of 2020 and into 2021, due in part to two recent events, the first one being Avicanna forming a partnership with US MSO Red, White & Bloom for distribution of Pura H&W products through the United States and targeting big-box stores and the second one being AVCN’s launch of Rho Phyto products via Shoppers.

At the same time that he praised Avicanna’s progress, the analyst also spoke with caution regarding the company’s cash position.

“While management has succeeded in reducing costs—SG&A declined from $5.5 million, to $3.2 million, to $2.9 million sequentially from 4Q19 through 2Q20)—we would be negligent in our work as analysts if we did not see AVCN's cash position of $0.08 million as a point of concern,” Sarugaser wrote.

“This said, between its long-time global agricultural partner, Grupo Daabon, its more recent partner, Tasly Pharmaceuticals, combined with management’s ability to constantly pull rabbits from hats, we are relatively confident AVCN should succeed in raising the requisite capital between now and achieving EBITDA-positivity in 2023,” Sarugaser said.

“Given our optimism motivated by AVCN's recent succession of positive announcements, which we believe will precipitate a revenue inflection, we cautiously raise our rating from Market Perform (3) to Outperform (2),” he said.

With the update, Sarugaser has maintained his $2.50 target price, which at press time represented a projected 12-month return of 78.5 per cent.