Auxly Cannabis is eating up market share, says Research Capital

Research Capital Corporation analyst Venkata Velagapudi likes what he sees from Auxly Cannabis (Auxly Cannabis Stock Quote, Charts, News, Analysts, Financials TSX:XLY), reiterating a “Buy” rating and target price of $0.50/share for a projected return of 138 per cent in an update to clients on Monday.

Originally founded in 1987 as Cannabis Wheaton Income Corp. before changing its name in 2018, Auxly Cannabis is a Toronto-based consumer-packaged goods company in the cannabis products market in Canada with a focus on developing, manufacturing and distributing cannabis products for wellness and recreational consumers.

Velagapudi’s latest analysis comes after the company’s Monday announcement in its third quarter financial report that it expects to increase its market share within the Canadian recreational cannabis industry.

“Auxly continues to make strides towards reaching its goal of achieving seven to nine per cent share of market in Canadian recreational cannabis sales by the end of the year through expanded sales growth opportunities founded in consumer insights, innovation and executional excellence,” said Hugo Alves, CEO of Auxly, in an October 18 press release.  “As planned capabilities have come on-line our product line-up has grown to include Cannabis 1.0 products, but our focus remains the same:  to put our consumers first and consistently deliver unique, exciting products under brands that they can trust and love.”

Overall, Auxly occupies the biggest market share on Cannabis 2.0 products among Canadian licensed producers at 15.4 per cent according to the company’s second quarter financial results. Velagapudi believes the company can retain its hold on that market on account of its strategic partnership with Imperial Brands, as well as its focus on customer insights to launch new product SKUs.

“Auxly will continue to gain market-share in Canada mainly driven by Auxly’s strong position in manufacturing cannabis 2.0 products, the company’s strategic partnership with Imperial Brands, and a strong product pipeline,” said Velagapudi, who noted Research Capital’s belief that sustainable market-share in the Canadian adult-use cannabis market should mainly determine a Canadian licensed producer’s intrinsic value.

Referring to data from Hifyre, Velagapudi said Auxly expects its market share to grow to 5.7 per cent by the end of the third quarter of 2021, compared with the 4.9 per cent rate it attained in the second quarter, with a pronounced increase to 6.4 per cent market share in September alone according to Auxly management, who attribute the increases to the successful launch of new product SKUs such as Back Forty pre-rolls and new dried flower offerings.

In addition, the company broke new ground in September with the release of its 132 Series Live Resin Black Cherry Punch Soft Chews through the Kolab Project brand, producing Canada’s first cannabis-infused live resin edible, and which were available for purchase in retail outlets in Ontario, Alberta, Saskatchewan, and Manitoba, as well as online at OSC.ca.

Overall, Velagapudi’s analysis notes that the company has $32 million in cash on hand compared to $113.6 million in debt, though Velagapudi also notes the company’s market cap to be $175.7 million.

The company’s most recent financial report came in August, headlined by revenue of $20.9 million to more than double its growth on both a sequential and year-over-year basis, with adjusted EBITDA improving to a $3.3 million loss compared to the $10.5 million loss reported in the same quarter of 2020, and an improvement over the $6.7 million loss reported in the previous quarter.

In Research Capital’s original coverage initiation on September 30, Velagapudi noted potential for significant growth for Auxly from a financial perspective, projecting an increase to $80 million in revenue in 2021 from the $51 million reported in 2020 for a potential year-over-year increase of 56.9 per cent, with projections of breaking into nine figures in 2022 ($128 million, 60 per cent potential year-over-year increase) and 2023 ($178 million, 39.1 per cent potential year-over-year increase), which is also when the company’s EBITDA is projected to turn positive at $9 million for a margin of five per cent.

Velagapudi also expects the company’s gross margin to spike to 35 per cent in 2021 from the 21 per cent reported in 2020, then levelling out at a projected 37 per cent in 2022 and 36 per cent in 2023.

With the company’s next quarterly reports expected in November, Velagapudi believes current analysis suggests Auxly is being undervalued in the cannabis marketplace given its current market share and valuation.

“Over the long term, we believe that visibility over positive free cash flow generation will be critical in improving the valuation for Auxly,” Velagapudi said. “Although we expect the margins to dilute slightly due to growing portion of cannabis 1.0 sales, we believe that growing revenue base will offset the impact of declining margins leading to an increase in EBITDA.”

Overall, Auxly’s share price has dropped 13 per cent for the year to date, topping out at $0.49/share on February 10 while recently bottoming out at $0.21/share on October 15.