Auxly Cannabis takes charge of its destiny, ATB says

ATB Capital Markets analyst Frederico Gomes still likes the look of Canadian cannabis stock Auxly Cannabis (Auxly Cannabis Stock Quote, Charts, News, Analysts, Financials TSX:XLY), maintaining an “Outperform” rating and target price of $0.45/share for a projected return of 95.7 per cent in an update to clients on Monday.

Originally founded in 1987 as Cannabis Wheaton Income 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.

Gomes’s latest analysis comes after Auxly Cannabis announced it had acquired the remaining 55 per cent equity interest of Sunens Farms Inc., the company’s former joint venture with Peter Quiring.

In completely taking over Sunens, which produces approximately 100,000 kilograms of cannabis annually in a purpose-built greenhouse facility in Ontario, Auxly paid Quiring a total of $5 million in considerations, including $500,000 in cash, $1.1 million in Auxly Cannabis shares, with the remaining $3.4 million coming in the form of an unsecured promissory note payable over 30 months in equal monthly installments with the first payment due 12 months after the closing date.

“The acquisition of Sunens, a highly automated greenhouse with a demonstrated ability to grow high-quality cannabis at scale, increases Auxly’s cultivation capabilities and strengthens our position as a leader in the Canadian cannabis market,” said Hugo Alves, CEO of Auxly in the company’s November 22 press release. “Having full ownership and operational control of Sunens gives us the security of supply, quality control, economies of scale and genetic exclusivity that will enable us to continue delivering quality products to our consumers under brands that they can trust. The ability to fully consolidate the activities of Sunens will improve gross margins and support Auxly’s path to profitability.”

Upon full consolidation of Sunens into its operations, Gomes expects the acquisition to prove immediately accretive to Auxly in terms of both the company’s EBITDA and its gross margin.

“We view the transaction as positive from a financial and strategic standpoint,” Gomes said. “Financially, margins may benefit as cost of goods decline through a vertically-integrated platform. Strategically, the full ownership of cultivation assets grants Auxly better control of its destiny with a secure source of supply.”

Auxly also reported its third quarter financial results last week, headlined by $24.5 million in revenue, which the company noted to be a 95 per cent year-over-year improvement, as well as 17 per cent sequential growth. The report beat the ATB Capital Markets projection of $24 million for the quarter, though it came in slightly below the consensus expectation of $24.7 million.

Auxly reported an adjusted EBITDA loss of $6.5 million in the quarter, significantly missing on the $2.6 million loss projected by both ATB Capital Markets and the consensus, while the adjusted gross margin came in at 17.5 per cent, way off the consensus projection of 29.1 per cent and representing only half of ATB’s 35 per cent estimate.

In his November 15 report, Gomes attributed the lower profitability and disappointing gross margins to production inefficiencies from new product ramp-up and equipment delays.

Looking ahead, Gomes expects Auxly to remain on a solid growth ramp, projecting $83.5 million in revenue for 2021 to yield a potential year-over-year increase of 64.4 per cent, then projecting a climb into nine figures at $154.2 million for 2022 for a year-over-year increase of 84.7 per cent, followed by another jump to a projected $200.5 million in 2023, a 30 per cent year-over-year increase.

Meanwhile, Gomes expects the company’s EBITDA to turn positive in 2023 at $15.1 million for a margin of eight per cent, following projected EBITDA losses of $23 million in 2021 and $6.8 million in 2022. 

In terms of gross margin, Gomes projects a steady increase in the percentage from the reported 21 per cent in 2020 to a projected 24 per cent ($19.7 million) in 2021, then moving to a projected 27 per cent ($41.2 million) in 2022, and a projected 30 per cent ($60.1 million) in 2023.

In the big picture, Gomes remains cautiously optimistic about Auxly and what it could become in the future.

“Despite our positive view of the transaction and what it could mean for the company’s long-term growth outlook, for now, we maintain our previously-published estimates unchanged considering the volatility and lack of near-term visibility in the Canadian cannabis market,” Gomes said.

Overall, Auxly’s share price has dropped 13 per cent over the course of 2021, topping out at $0.49/share on February 10 before hitting a decline. After a rebound from its yearly low of $0.21/share on October 15, the price has dropped by 29.4 per cent in the last 10 days.