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Auxly Is Undervalued As It Expects Production Capacity Of 160,000 Kg – Auxly Cannabis Group Inc. (OTCMKTS:CBWTF)

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Expecting to have production capacity of 160,000 kg, with CAD 236 million in cash and only an enterprise value of $202 million, Auxly Cannabis (OTCQX:CBWTF) seems undervalued. Comparing the enterprise value and the expected production capacity of larger competitors, CBWTF should have larger enterprise value. Market participants should be expecting the enterprise value to increase quite a bit as the production capacity increases and revenues commence to flow.

Business

Founded in 1987, Auxly Cannabis is a vertically integrated cannabis company.

 

Source: Company’s Website

The company expects to have fully funded capacity of 160,000 kg by 2021. In order to do so, it is acquiring many competitors and signing deals with large players in the industry like Aphria Inc. (APHA) and Dixie Brands (OTC:DXBRF). The images below provide further details on this matter:

 

Source: Presentation

 

Source: Presentation

Auxly Cannabis owns three business segments: upstream, midstream, and downstream. The first segment is responsible for cultivating cannabis and signing agreements with other producers. As noted in the lines below, CBWTF has already acquired cultivation capacity:

The Company has acquired cultivation capacity by developing cannabis cultivation facilities in Canada and internationally. The Company remains focused on building a diverse cultivation platform comprised of wholly-owned assets, streaming partnerships, joint venture partnerships and commercial offtake arrangements.” Source: Management Discussion

The midstream segment focuses on the development of intellectual property, branding and licensing, R&D, and manufacturing. It will be seen later that this segment seems to be the most relevant in terms of income.

Finally, the downstream segment focuses on the generation of distribution channels. It includes approving retailers in jurisdiction in which the sale is legal.

Balance Sheet

As of September 30, 2018, with an asset/liability ratio of 3.7x, the company’s financial stability is quite strong. The company reports CAD 236 million in cash with long-term investments worth CAD 51 million, and total assets of CAD 501 million.

Like other marijuana companies, CBWTF reported massive asset growth in 2018. From December 2017 to September 2018, the company reported an asset growth of 118% and cash growth of 615%. It means that many investors recently realized that the company’s business model seems quite promising.

CBWTF also reports intangible assets of CAD 110 million from the acquisition of other competitors. As this is not a small amount of money, investors may appreciate getting to know a bit about the companies acquired. In the image below, there are details about four companies recently acquired. The company is paying for the new acquisitions with shares, which investors may not appreciate. Keep in mind that investors don’t feel attracted to companies that issue large amount of new stock and create stock dilution.

 

Source: OTC Markets

The image below provides further details on the list of assets:

 

Source: OTC Markets

The list of liabilities should not fear investors as the total amount of cash is way above the total amount of liabilities. With that, investors should study the type of liabilities. The company reported convertible debentures worth CAD 92 million and long-term loans worth CAD 1,000 million. The lines below provide further details on the interest expense and the exercise price at which they can be converted into stock. Certain investors may believe that the interest expense is not cheap. With that, it is also relevant noting that such type of securities can create stock dilution, which could push the stock price down.

 

Source: OTC Markets

The image below provides further details on the list of liabilities and the equity structure:

 

Source: OTC Markets

Income Statement

The income statement is what investors may not appreciate. The company did not report revenues from the sale of cannabis in 2018. CBWTF did report net income, but it was from research contracts and the financial instruments.

Regarding the total expenses, CBWTF reported CAD 36 million in the nine months ended September 30, 2018, with share-based expenses of CAD -14.5 million. The net loss in this time period was equal to CAD -32 million. The image below provides further details on this matter:

 

Source: OTC Markets

What investors should get to know is the cash burn rate as the company may need some years until break-even point is reached. Keep in mind that sale of equity in the future could lead to share price depreciation. For the nine months ended September 30, 2018, CBWTF reported CFO of CAD -25 million. With the total amount of cash reported in September 2018, the company should be able to operate for about 6-7 years before running out of cash.

 

Source: OTC Markets

No Low Float, No Price Volatility Risk

Unlike many companies trading in the OTC Markets, CBWTF reports large float, which should be appreciated. The float represents 83% of the total amount of shares outstanding, which means that there is no volatility risk. The image below provides further details on this matter:

 

Source: OTC Markets – Equity Structure

Valuation

With 552.6 million shares outstanding at $0.56, the market capitalization equals $309 million. Adding debt of CAD 95 million or $71 million and deducting cash of CAD 236 million or $178 million, the enterprise value equals $202 million.

Since the company does not generate revenues from the sale of cannabis, using the estimated annual capacity seems necessary to assess the valuation of CBWTF.

Let’s assess the valuation and capacity of other competitors. Cronos (CRON) has an enterprise value of $1.94 billion with an estimated capacity of 40,150 kg. It expects to have a total annual capacity of 117,150 kg. The image below provides further details on this matter:

 

Source: Crono’s Website

With this figure in mind, the ratio EV/Capacity of Cronos is $0.016 million per kg. As a result, CBWTF with expected capacity of 160,000 kg should have an enterprise value of $2.5 billion.

Aurora (ACB) expects to have total capacity of 500,000 kg per year and has an enterprise value of $4.92 billion. The EV/Capacity is 0.098x. With this figure, CBWTF should have an enterprise value of $1.47 billion. The image below provides further details on the expected capacity of Aurora:

 

Source: Aurora’s Website

Taking into account the figures reported below, investors should be expecting to see CBWTF with a larger amount of enterprise value. Determining the total amount is very difficult, but it seems clear that it should be larger than $202 million.

The company is trading at a low valuation for two reasons. Firstly, the amount of built capacity is not large, and CBWTF is not reporting any revenue from the production of cannabis. As a result, many investors are not even looking or studying the company. In addition, the company trades in the OTC Markets and seems to be a bit unknown. It means that the liquidity in the market may be quite low, which pushed the share price down.

The company’s financial stability is quite strong, and the company reports CAD 236 million in cash. It means that the company has cash to build facilities or acquire companies with production facilities. With this in mind, investors should be expecting CBWTF to increase its capitalization as capacity expands. The company seems to be interesting for very long-term investors looking to wait until 2021 when the targeted production should be reached.

Conclusion

With CAD 236 million in cash, an enterprise value of $202 million and expected capacity of 160,000 kg, CBWTF seems very undervalued. Using the expected capacity of Aurora or CRON, the company should have an enterprise value of more than $1.47 billion in the future. Investors should have to wait two years until the facilities are built or acquired, but investing on this name seems interesting. Bear in mind that the company is still trading on the OTC Markets and the liquidity is not adequate, which pushes the share price down. As the company returns revenue growth and reports a good amount of capacity, more investors should study this name. As a result, the share price should increase.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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