First-quarter results have been weighing on Cronos Group Inc.’s (CVE:MJN) stock price of late, but things seem to be looking up for 2018
SmallCapPower | May 9, 2017: Cronos Group Inc. (TSXV: MJN) has been the top performer on the Ubika Marijuana Index this year, as its stock has risen 99% YTD as of the close of trading on Friday, May 5, 2017. In 2016, the Company shifted their corporate strategy from being a passive holding company to being an active owner and operator of their wholly-owned subsidiaries Peace Naturals Project Corp, and In the Zone Produce Ltd. The Company’s newly-appointed and experienced management team has put it at an exceptional operational and strategic position, as they have focused on optimizing and ramping up production at their wholly-owned subsidiaries, and increasing domestic and international distribution networks.
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Peace Naturals Project Corp. was acquired in late 2016. It has a 38,000 sq. ft. production facility located on a 90-acre parcel of land in southern Ontario, giving them 80+ acres of flat land appropriately zoned for future development. The Company has recently undergone renovations, which added ~1,200 kg of production capacity and made the plant Good Manufacturing Practise (“GMP”) certified. The plant has a capacity of 4,000 kg, in which they are currently licensed to sell 2,500kg, implying the Company will be able to expand margins through operating leverage if the government grants them the ability to sell more marijuana.
On the other hand, In the Zone Produce Inc., is a licenced producer based in Okanagan Valley, BC. They currently licence a 2,000 sq. ft facility, and are licenced to sell 100 kg/year. The Company just purchased the adjacent 17-acre property, and the plant sits on 31 acres of land, which is zoned appropriately for expansion.
Additionally, Cronos Group owns a 21.5% interest in Whistler Medical Marijuana Corp., which currently operates a licensed facility of 12,000 sq. ft. and is licensed to produce 700 kg/year. The Company has great growth prospects, as it has recently announced plans for a two-phase expansion. Phase One consists of a 65,000 sq. ft purpose-built facility, which the management estimates to have a capacity of 6,500 kg/year. Phase Two consists of an 80,000 sq. ft facility and an option to purchase 160 acres of neighbouring land. Whistler is also an iconic marijuana destination, which adds to the significance of this ownership stake.
On May 1, 2017, Cronos Group posted first-quarter EBITDA of negative $1.3-million on revenue of $400,000, which fell short of the expectations of PI Financial analyst Jason Zandberg.
“The total value of MJN’s portfolio of LPs is estimated to be $26 million to $36 million higher than what is stated on its balance sheet,” said Mr. Zandberg. “The balance sheet values its investment in Whistler Medical Marijuana (21.5% ownership), Hydropothecary (1.9%), ABcann Medicinals (6%), Evergreen Medicinal (6.25%) and Canopy Growth shares (could increase depending on Vert Medical achieving its Health Canada license) at $7.7 million whereas we believe that the value is closer to $35 million to $45 million.”
Mr. Zandberg think Cronos Group will record EBITDA of negative $541,000 on revenue of $9.06-million in fiscal 2017, but expects results to improve to EBITDA of positive $12.18 million on $42.7 million in revenue in 2018.
Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.
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