181 per cent upside to Auxly Cannabis, says Research Capital

Research Capital Corporation analyst Venkata Velagapudi still has a positive angle on Auxly Cannabis (Auxly Cannabis Stock Quote, Charts, News, Analysts, Financials TSX:XLY), maintaining a “Buy” rating and $0.45/share for a projected return of 181 per cent in an update to clients on Tuesday.

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 announced the closure of its two cultivation facilities in Nova Scotia, having never begun cultivation at its 158 acre outdoor facility in Hortonville. Instead, the company will focus on optimizing the output from its 1.1 million square foot greenhouse cultivation facility in Leamington, Ontario, which Velagapudi notes should provide Auxly with adequate cultivation capacity, storage, processing, and manufacturing space to scale its operations.

“We view the streamlining of cultivation assets to be positive mainly due to three reasons,” Velagapudi said. “Firstly, this enables the company to turn relatively asset light. Secondly, the potential proceeds from the sale will boost the capital position. Thirdly, the cost savings from lower operating expenses will improve profitability.”

According to the company, the decision was made with an eye toward optimizing its vertically integrated platform and effectively reducing operating costs, while ensuring no material impact on its cultivation or processing capabilities and forecasted sales revenue.

“While we believe that taking these steps ultimately makes Auxly a more focused company that is better positioned to achieve its strategic goals, it was an extremely difficult decision because of the impact on our talented and hard-working Robinsons employees,” said Hugo Alves, CEO of Auxly in a February 7 press release. “We are diligently working to ensure that we achieve our goal of reaching adjusted EBITDA positive by the first half of 2022 and deliver stable and profitable financial performance for our stakeholders.” 

“Optimizing our vertically integrated platform allows us to strengthen our capital position, increase the overall efficiency of our operations and enhance our ability to continue to meet the growing demand for Auxly branded products,” Alves added.

In Velagapudi’s view, Auxly will continue to gain market-share in Canada mainly driven by the company’s strong position in manufacturing cannabis 2.0 products, the company’s strategic partnership with Imperial Brands, and a strong product pipeline.

Overall, Velagapudi believes Auxly to be undervalued given its current market share.

“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,” Velagapudi said. “Further automation of production facilities (more specifically related to Pre-rolls) and economies of scale at Sunens facility will be critical in gradual recovery of profitability metrics for Auxly.”

Auxly’s stock price has dropped off by 56.6 per cent over the last 12 months, and 13.2 per cent since the beginning of 2022. The stock’s 52-week high was $0.49/share set on February 10, though it has since dropped off considerably, hitting a 52-week low of $0.15/share on January 24.