FSD Pharma Inc C.HUGE

The Clocks Have No Hands - Valuation Of HUGE

[Dividendspay]

 

I have been waiting for an updated financial report to analyze this company, so I have 

been away for a while, as there hasn’t been any new data to report.

My valuation draft-posted below, was an attempt to provide a rational valuation approach to  a speculative situation.

That is -it is impossible to value a company that has no revenues and we have zero information on costs and margins  so every assessment is based on predictions when we lack key data from the income statement.

Essentially, it is a story at this point, and admittedly, a nice one. Congratulations to those who have drank the koolaid. Still, let’s put down the book for a second and look around.

 

At this point we have no revenue and production is still in its infancy.

So any valuation draft remains pure speculation.

The issue I am having is that the speculation on revenue is changing before we have started as the prices I used are coming down 

 

Having said that I drafted out  2 scenarios-one which was based on things going right.

Interestingly, everything has gone right!

The price range I thought reasonable if everything went right was .8-1.00,and here we are.

 

I am not so presumptuous to think one could actually predict price, especially not in a manic situation. This was pure luck to come into this range.

 

I see people calling 1.0,1.5 by weeks end, and even 4.5!

No one can do this - face it folks - that is pure speculation, and appropriate   to where we are.

 

Caveat emptor. 
And remember some insiders have been quick to sell, very early in the story, and have made millions doing so.

 

We are in a bubble-the clocks have no hands-and I can not value this company at all at this point.

 

Is it worth 1.00?2.00?5.00?

No idea.

 

I do know we are priced for perfection.

 

One of the directors has public ally admitted we are in a bubble. This will continue as long as it will, and the greater fool theory prevails.

 

Remember the words of a great investor:

 

“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”

– Warren Buffett, Chairman’s Letter to Shareholders of Berkshire Hathaway (February 28, 2001)

VALUATION DRAFT

 

Hi all.

Been thinking about this a bit more, and thought we might start the process of trying to understand the current and future value of HUGE.

This is clearly a draft, but since no one else has started this-I will. It would be great if others could add to/correct this. I will update it, if time permits and IF I remain interested in this stock, as new data arises.

Normally I just do these solo, but we are small group here so thought it might be a fun group exercise.

 

I know this board gets emotional, and any attempts to have an objective discussion results in name calling, but that’s Ok-you will note I don’t even respond to that stuff-just not worth the energy, and the wrong kind of energy.

 

Ok-to understand the value of HUGE , FROM MY PERSPECTIVE, we need data on operational metrics, which are missing(Actual Health Canada approved and sold product in grams/Kg, cost, margins, etc) . We only have predictions, and lack key data points, so my approach is to look at the MJ market specifically, but also look at the market in general and try to extrapolate and project.

I read some interesting analyses over at Cannalyst and an excellent article over at savestacks.com. , and thought we can start the process here so that as real data comes in we can see if we are close.

 

So a major disclosure/caveat-I normally use a much more detailed analytical model (using  value, cash flow,and momentum but there isn’t much info for HUGE and this is all speculative. If I get a chance I will do a sensitivity analysis to see how different scenarios and can post if folks are interested.

Ok so Aphiria reported for the fourth quarter and year ended May 31, 2018, last week.

(Which incidentally they are to be commended by their transparency and clarity in reporting)

Key highlights:

-- Eleventh consecutive quarter of positive Adjusted EBITDA from ACMPR 

operations. $2.2 million in adjusted EBITDA from ACMPR operations in 

the quarter and $8.4 million for the year, a 38% increase over the prior 

year. 

Net loss for the three months ended May 31, 2018 was $4,992 or $0.06 per share

So while there was a loss in the quarter, they also noted that, net income for the year was $29,448 or $0.18 per share

So for fun lets apply these metrics to HUGE (with caveats-this isn’t HUGE-maybe they will be better/worse?;hydroponic cost and revenue vs greenhouse;execution here vs planned and many other connundrums)

Currently with Aphiria you are paying roughly $10.38 for .18 in earnings per share

They have outstanding shares of 232.01M (Bloombergs), Market cap 2.4B or I calculate  based on shares and current EPS that revenues could be 41,760m

Now, the presser also said that –" Annual production capacity in Canada currently at 30,000 kgs at Aphria One and 5,000 kgs at Broken Coast”

So they are producing 35,000kg annually (I didn’t use a calculator for that one so someone check the math :)

Now we don’t have much production yet, but from HUGE website (source:Investor slide deck) the current production capacity is 4000kg

So if we do the math we would come up with 11% of the production, or projected revenues of HUGE about 4,593 M

So with  a share count of issued shares 1,319,600,458 and diluted1,531,842,91 (From HUGE website) .003 current or .002 diluted EPS

So you are paying .14 for .003 of earnings which means it would take 46 years to recoup your investment

(This of course assumes they were profitable, which they aren’t as they are buring cash now as they grow, if I understand this correctly)

 

Ok-I hear it-you moron, you missed the point….

What about growth, don’t you understand?

 

 Ok- So if we look at the planned expansion and partnership (expansion of which is hedged ~49%to Auxuly) what can we expect?.

Well you can take HUGE estimates from the investor slide deck- but lets start by taking an out side perspective…

If you go to the Auxuly website they indicate that:

“Auxly will develop certain segments of FV’s footprint in exchange for 49.9% of all the cannabis supplied by these segments. Auxly is expecting to receive 18,750kg per annum of product upon completion of the first phase of the project.( https://auxly.com/partners/)

Ok now-so ~18,750kg…

Well Aphiria is producing 35,000kg as noted on the recent presser …so we have 53% of this or 22M revenues might(I repeat might) be expected or .0166 EPS or .0146 fully diluted

Now what will the market assign this EPS?

Currently MJ stocks can range widely-30-50 100+???

Typical ranges might be 20-30 giving a share price of .332-.498 and diluted .29-.438

And if the PE expands like now to 50-60 you could see a share price of .8-1+ who knows that would also be a market cap north of 1 billion

So……..

Where Things could go right:

1. We are paying for potential and at that could see a 2-5 bagger, but could it be more as many here have suggested?
2. Multiple expansion-MJ mania could push valuations to 100+, as legalization goes mainstream
3. Also maybe physical expansion will go beyond this to millions of square feet. With these multiples ?10 bagger+
4. There is also the greater fool theory-and certainly revenues will be growing impressively and that will create excitement and the prices will jump up as retail investors get impressed by that
5. Other revenue streams open up (pharma side)
6. Take over bid
7. Institutional interest

 

Where things could go wrong:

1. We are paying for potential - This bakes in perfect execution (No mold issues-expansion and costs are tightly contained, no commoditization of MJ producers, foreign production doesn’t come in;cost or revenue of hydroponics). Projections  also assumes they are cash flow positive, which they aren’t. Also maybe expansion will go beyond this to millions of square feet(Although the map of planned expansions does not reflect the current building footprint, so more costs (unless I have this wrong, and Aux doesn’t indicate that they are funding this-so maybe someone has some info here) Also any expansion has costs and I have made comparisons based on current production at Aphiria  not planned expansion  (Lots can go wrong with renovations and getting Health Canada to approve product, notwithstanding a food production facility)
2. Also with APH we are paying a high multiple for actual production, and growth-here at HUGE we have plans only and no revenues so higher risk
3. Sequential growth requires expansion of space in millions of square feet-not easy, and competition will come in if easy (commodity scenario)
4. Multiple compression- I lived through the dotcom era when stocks had these high multiples and then came crashing to earth. We also have to assume that the high valuations given MJ stocks will hold. PE ratios of 50-100, rarely do, with those that have a longer view of the market.   I know…this time its different
5. Government compression of profit margins-looking at alcohol-they want their slice-do we really think they will accept 80% margins in the future?
6. With a dual share structure , controlling interest lies with insiders so it also assumes that cash flow, actually flows to shareholder equity side of the balance sheet and doesn’t get blown out in compensation, or other “expenses”

Taken together there is a lot of uncertainty, and speculative projections here, but it is an admittedly feeble shot at valuing this( and I have tried to present both sides to be fair)

Anyone else have any ideas on how to value this?