CIBC commentsCANOPY GROWTH CORPORATION
Strained Credibility: EBITDA Guide Seems Unachievable
Our Conclusion We believe WEED faces more downside, as ongoing elevated cash burn combined with optionality investments have stretched its balance sheet, while operating results have declined materially and will have to improve more than previously expected to achieve profitability. Some assets in Canopy’s portfolio have value, but we believe WEED has built a strategy dependent on U.S. legalization, where prospects have worsened.
This stock still trades at 4.7x C2023E sales, more expensive than peers, particularly questionable given declining fundamentals. We have reduced our forward sales estimates by ~10%, and we now use a 3x EV/Sales multiple.
Our price target moves to $5 ($6.50 prior) and we rate WEED Underperformer.
Key Points Positive EBITDA In F2024 Seems Unlikely. Canopy’s guidance of positive EBITDA in F2024 is difficult to bridge to. Using adjusted numbers, i.e. -18% cash GM in FQ4 (excl. inventory write-downs and subsidies), we calculate run-rate EBITDA of -$425MM. Planned cost cuts of up to $150MM achieve only 35% of the delta to positive territory. Even assuming a lofty 50% contribution margin, we estimate Canopy would need a 50% sales CAGR, and no new SG&A spending, to reach the target. This does not seem plausible. Divestitures of unprofitable segments (retail) could help, but domestic cannabis industry growth is ~25% Y/Y, and Canopy’s strategy differs little from others, while past execution has been lacking. Meaningful CPG growth is likely, but we estimate closer to 20%/year. Balance Sheet Questions To Come.
Canopy’s once-enviable balance sheet has deteriorated, moving from a net cash position of $4.1B in 2018 to a net debt position of $135MM today. Gross cash sits at $1.4B, but $600MM of convertible debentures mature next summer. These will need to be refinanced in one form or another: Canopy’s ~$900MM King Street loan contains a US$200MM minimum liquidity covenant, that, without additional fundraising, would be breached in just six quarters if Canopy were to repay the converts, by our estimates. Even if WEED hits positive EBITDA, annual cash burn will be nearly $200MM from debt servicing and capex alone.
U.S. Legalization Murky As Ever. Canopy’s M&A strategy was always dependent, in our opinion, on U.S. legalization, in order to control U.S.-based businesses. The likelihood of this, in the near-term at least, seems as low as in recent memory given a combination of other legislative priorities, ongoing congressional gridlock, and White House disinterest. Furthermore, the specter of a Republican congress in November does not help this industry.