Auxly Cannabis has 135 per cent upside, says Raymond James

Raymond James analyst Rahul Sarugaser is still keen on Auxly Cannabis (Auxly Cannabis Stock Quote, Charts, News, Analysts, Financials TSX:XLY), maintaining an “Outperform 2” rating and target price of $0.40/share for a projected return of 135.3 per cent in an update to clients on May 16.

Toronto-based Auxly Cannabis develops, manufactures and distributes cannabis products for wellness and recreational consumers in Canada, with products like vape cartridges, dried flower, concentrates, chocolates, soft chews, oil drops, capsules, topicals and hard candy under an umbrella of brands.

Sarugaser’s analysis came after the company released its first quarter financial results for the 2022 fiscal year.

Auxly’s Q1 was headlined by revenue of $22.6 million to remain in line with the Raymond James estimate of $21.9 million, though it was a slight miss of the consensus target of $25.4 million as well as being a drop from the $29.3 million reported in the previous quarter.

“While as expected seasonally soft 1Q22 sales did impact XLY, the company maintained its #1 national position in Cannabis 2.0 sales, moved into the #4 position by total adult-use sales, and drove strong sales in its relatively newflower category,” Sarugaser said. “We expect sales will rebound in 2Q22 and escalate materially through 3Q and 4Q22, driven by a growing national market, XLY’s continued capture of market share, and XLY now having put some 1Q22 supply chain and flower availability headwinds in the rearview, for the most part.”

Meanwhile, the company provided a beat on its margins, as its reported adjusted EBITDA loss of $5.6 million came in ahead of the consensus estimate of a $6.7 million loss while significantly outpacing the $10.7 million loss projection set out by Raymond James.

However, the news wasn’t quite as good on the net income front as the company reported a $40.7 million loss, though Sarugaser noted that it was driven by the $25.7 million non-cash impairment related to the closure of its Robinsons facilities in Nova Scotia’s Annapolis Valley; without that, the report would have been much closer to the Raymond James estimate of a $17.5 million loss and the consensus projection of a $15.2 million loss.

All told, the company finished the quarter with $16.3 million in cash available compared to $14.8 million in the previous reporting period, paired with $175.6 million in debt, of which $108.2 million is convertible.

“Though this quarter presented some ongoing supply chain and operational challenges preventing us from meeting consumer demands for our branded cannabis products, we believe we have taken the necessary steps to correct these issues for the coming quarters, allowing us to increase fill rates and continue with our exciting new product launches throughout the year,” said Hugo Alves, Chief Executive Officer of Auxly in the company’s May 16 press release. “We continue to lead the market in cannabis 2.0 products and remain focused on building leadership in dried flower and pre-rolls and improving our business to achieve our goal of reaching adjusted EBITDA profitability.”

Looking ahead, Sarugaser is keeping a close eye on an anticipated escalating top-line and improved operational efficiencies coming online, paired with escalating capacity and reduced input costs from its Auxly Leamington acquisition, with an intent to move toward positive EBITDA by the second half of 2022. However, Sarugaser is still somewhat wary of the company’s gross margin, which came in at 16 per cent for the quarter to represent a decrease from the 23 per cent margin reported in 2021, though it represented a slight improvement from the 15 per cent reported in the previous quarter.

According to Sarugaser, the company is aiming for a gross margin well above 30 per cent in 2022, leaning on anticipated benefits from Auxly Leamington and organization-wide manufacturing improvements to make that happen.

Despite the slightly softer first quarter sales for Auxly, Sarugaser maintained a $139 million revenue estimate for 2022, good for a potential year-over-year increase of 63.5 per cent. From a valuation perspective, Sarugaser forecasts the company’s EV/Revenue multiple to dip from the reported 3x in 2021 to a projected 1.8x in 2022.

Meanwhile, Sarugaser continues to forecast EBITDA losses for Auxly moving forward, as he forecasts a $23 million loss for 2022 to match the loss reported from the 2021 year-end figures.

“Overall, we think XLY managed 1Q22 quite well, particularly given seasonal sales challenges and supply chain issues during the period,” Sarugaser said. “We look forward to seeing sales rebound strongly through the remainder of 2022, alongside margin expansion driven by the company’s recent structural and operational improvements.”

Auxly’s stock price has dropped by 34.2 per cent since the start of 2022, a year filled with peaks and valleys to this point as it last reached its start-of-year trade value of $0.19/share on March 29, while closing today at a 2022 low of $0.22/share.