Solid financials from emerging U.S.-based cannabis company Cannex Capital Holdings Inc. (CSE:CNNX)
SmallCapPower | August 30, 2018: Healthy quarter to start. On August 29, 2018, Cannex Capital Holdings Inc. (CSE:CNNX) reported its seven-month F2018E financials (ending April 30, 2018). Revenue and Adj. EBITDA came in at $5.3M and $4.0M, while CFPS and EPS were $0.02 and -$0.03, respectively. Working capital was reported at $4.1M and the cash balance now sits at $11.9M. Of note, the EPS loss was driven by one-time costs related to the Company’s go-public transaction. Importantly, stock-based compensation appears abnormally high at $3.8M, which significantly skewed the bottom line. We would advise investors to focus on the Company’s encouraging top-line revenue, positive cash flow and adj. EBITDA for the quarter.
Cannex has some of the highest yields and lowest cost structures in the industry. In 2017, Cannex’s operating subsidiary, Northwest Cannabis Solutions, produced ~8,000 kg of cannabis with yields of 331 grams/sq. ft., significantly exceeding the industry indoor average of 160 grams. The operating facility is located in Tumwater, Washington, and includes 60,000 ft2 of cultivation space with 30,000 ft2 of flowering canopy and 40,000 ft2 of additional space for extraction/processing, manufacturing/kitchens, packaging, distribution and administration.
In a league of their own, ahead of the game, and trades at a discount. If we annualize Cannex’s seven-month revenue for comparative purposes, it equates to $9.1M in revenue and $6.8M in adj. EBITDA. This equates to EV/sales and EV/EBITDA multiples of 14.3x and 19.1x. While this might seem high, we highlight that 1) the sales multiple is a discount to its U.S.-based and Canadian-based peers, which trade at an average of 15.2x and 22.8x and; 2) there is only one other covered company (Village Farms) estimated to have positive EBITDA in 2018. On a 2019E basis, Cannex trades at 7.8x EV/EBITDA, a significant discount to U.S.-based peers, which trade at 13.4x. We believe there is a distinct regulatory discount for U.S.-based cannabis companies that trade in Canada. Once more investors are aware of Cannex’s success, its significant discount and the significant market opportunities available in the U.S., we believe this gap in valuation should close over time. To illustrate, Aphria is currently trading at 60.0x 2019 EV/EBITDA.
Cannex Capital Holdings Inc. (Cannex) is a Canada-based company that provides a range of services including real estate, management, financial and branding to licensed cannabis business operators. Primarily in the U.S., Cannex is focused on premium indoor cultivation, extraction, value-add manufacturing and branding of edible and derivative products as well as distribution and retail operations. The Company is building a portfolio of scalable, cash-generating cannabis assets that produce consistent and reliable branded products that can be cross licenced to Cannex portfolio companies or independent operators.
The Company’s subsidiary, BrightLeaf Development LLC, owns the assets of the largest producer/processor in Washington State, Northwest Cannabis Solutions. Cannex is also in the process of acquiring Jetty Extracts, one of the top 10 largest producers/processors in California and one of the most trusted cannabis extract brands in the state. Jetty products are distributed in more than 50% of the currently licensed retail stores in California.
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