Canopy Growth Corp. (CGC-T: C$3.79) August 30, 2016 BUY Dundee Target: C$4.75 Daniel Pearlstein / (647) 253-1160 dpearlstein@dundeecapitalmarkets.com FQ1 Brings Another Strong Quarter Of Revenue Growth CGC-T New Last Rating: -- BUY Target: -- $4.75 Projected Return: -- 25% F2021 EBITDA (MM$) -- $82 EV/EBITDA -- 4.8x Company Data Price (08/29/16): 52-Week Range (H-L): $4.24 Market Capitalization (MM$): Enterprise Value (MM$): Shares Outstanding - Basic (MM): Shares Outstanding - Diluted (MM): Avg Daily Volume (3 Mos) (000s): Cash (MM$):* Debt (MM$): Working Capital (MM$): Fiscal Year End * Dundee Estimate CGC-T: Price/Volume Chart $3.79 $1.50 $434 $394 114.4 122.9 898 $50.00 $9.80 $37.65 March Forecasts (Mar YE) 2015A 2016A 2017E Price per gram ($/g) 7.41 7.35 6.81 COGS ($/g) -- 2.87 2.26 Revenue (MM$) 4.4 14.7 40.7 EBITDA (MM$) (3.6) 6.2 0.6 EPS ($/sh) -0.23-0.02-0.05 OP CF (MM$) (10.9) (12.4) 5.5 CF/share ($/sh) -0.34-0.16 0.05 Capex (MM$) 0.0 (10.7) (17.5) FCF (MM$) (26.3) (25.6) (13.2) All Figures in C$ Unless Otherwise Noted Source: FactSet, Company Reports, DCM Canopy Growth Corporation (CGC-CA) Volume (Millions) Price (CAD) Volume Canopy Growth Corporation 4 0 Oct-14 Apr-15 Oct-15 Apr-16 Source: Factset Company Description Canopy, formerly Tweed Marijuana Inc., is a medical marijuana company based in Smiths Falls, ON. It is Canada's first multi-licensed LP. Tweed acquired Bedrocan, another LP, in June 2015 and the combined company now holds four licenses in four separate facilities. 5 4 3 2 1 CGC reported another strong QoQ revenue growth with sales of $7.0 MM (up 40% QoQ) in line with our estimate of $7.1 MM. Canopy is our top pick in the MMJ space for its current medical market leadership, three large domestic production facilities, multiple international partnerships, stacked balance sheet, and a track record of being a consolidator hunting for bargains. Canopy reported FQ1 (ended June 30) revenue of $7.0 MM and 40% QoQ revenue growth, in line with our estimate of $7.1 MM. We continue to expect strong QoQ top line growth from the leading LPs. The company sold over 984 kg and kg(eq) of bud and oil extracts (up 41% QoQ) at an average price of $7.09/g(eq) vs. our estimates of 742 kg of bud at $7.11/g and 124 kg(eq) of oil at $15.00/g(eq). Higher than expected bud sales due to accelerated patient enrollment offset lower than expected oil sales, although Bedrocan had only been selling oils for one month of the quarter. Management noted on the call that oil extracts represented a single-digit percentage of sales ($) during the quarter and we expect that proportion to increase in the near term. If we assumed oil sales were exactly 10% of the $7.0 MM in sales, that $700k would translate to 47 kg(eq) of oil extract sales during the quarter at an average price of $15/g(eq). Canopy ended the quarter with 16,000 registered patients, up 33% QoQ, and has now reached over 21,000 registered as at August 28. Adjusted gross margin (aka Adjusted Product Contribution) of 63% was also right in line with our estimate of 62% and last quarter's 63%. Management reported an average cost per gram of $2.62, which met our expectations but we believe there is still room for improvement as yields continue to increase and further economies of scale are realized. Canopy's opex spending might be starting to flatten as the platform leverages its market leadership position both domestically and internationally. The company's operating expenditures (G&A, S&M, R&D) decreased to 79% of sales this quarter compared to a range of 100% - 110% four of the last five quarters. We calculate negative adjusted EBITDA for the quarter of -$1.1 MM which was again right in-line with our -$1.2 MM estimate. We believe Canopy's leadership position could be affirmed if this early sign of cost stabilization is paired with its ~40% QoQ revenue growth seen from each of the last five quarters. We are maintaining our BUY rating and price target of $4.75 target. Our target is based on a 7.5x EV/EBITDA multiple on our FY2021E EBITDA of $82 MM (both unchanged). CGC trades at 4.8x our FY2021E EBITDA (peers at 3.5x), and 6.1x our CY2017E revenue (peers at 4.2x). We look five years down the line for our valuation year because in our view the rec regime would be in place for three years, and it is a more relevant time period to value the industry's potential..... Continued on Page 2 Please see Disclosures and Disclaimers at the end of this report. A division of Dundee Securities Ltd. Dundee Capital Markets is a registered trademark of Dundee Corporation, used under license.
BALANCE SHEET STACKED FOR PLATFORM-WIDE CAPACITY EXPANSION The commentary from management on the conference call was consistent with our most recent expectations for the rollout of the platform including: capex for production capacity expansion, the addition of high capacity oil extraction and encapsulation equipment, and a dealer's license to build on international initiatives. Further detail can be found in our FQ1 preview note from last week. Figure 1 - CGC Q1/F17A Financial Results Dundee Est. Q/Q Q1/F17A Q1/F17E Variance Q4/F16A Growth Q3/F16A Q2/F16A Q1/F16A ($MM, unless otherwise noted) Total Revenue $7.0 $7.1-1% $5.0 39% $3.5 $2.5 $1.7 Adj. Gross Margin $4.4 $4.4-1% $3.2 38% $2.4 $1.5 $1.0 63% 62% 1% 63% 0% 70% 62% 60% Adj. EBITDA* ($1.1) ($1.2) 5% ($2.1) -45% ($1.1) ($1.8) ($1.4) EPS -0.04-0.02-0.05-0.04 0.06 0.02 *defined by Adjusted Product Contribution - (Operating Expenses) Source: Company Reports, Dundee Capital Markets Figure 2 - MMJ Sector Comp Table All in CAD$ Ticker Rating Target Last S/O FD S/O Mkt Cap Cash Debt EV LSC EV/LSC EV/EBITDA EV/Sales Performance $/sh MM MM MM$ MM$ MM$ MM$ kg $/g CY2016 CY2017 FY2021 CY2016 CY2017 1mo 3mo 6mo Aphria APH-T B $2.75 $2.51 87.3 109.9 $219 $40.0 $2.9 $182 2,600 70 62.9x 19.2x 3.9x 10.9x 5.7x 12% 82% 124% Aurora Cannabis ACB-C $1.04 192.5 254.3 $201 $23.0 $9.4 $187 1,000 187 -- -- -- -- -- 91% 74% 41% Canopy Growth CGC-T B $4.75 $3.79 114.4 122.9 $434 $50.0 $9.8 $394 7,440 53 NM 28.4x 4.8x 12.2x 6.1x 20% 49% 33% Emerald Health EMH-T $0.35 54.2 58.2 $19 $1.0 $0.0 $18 -- -- -- -- -- -- -- 73% 69% 115% Mettrum Health MT-T B $3.25 $2.62 46.1 49.7 $121 $29.0 $3.4 $95 3,550 27 NM 12.3x 3.0x 3.8x 2.1x 0% 71% 72% MMJ Phytotech MMJ-AU $0.24 141.1 164.3 $33 $1.9 $0.5 $32 -- -- -- -- -- -- -- -9% 7% -28% OrganiGram OGI-T B $2.00 $1.41 84.0 106.4 $118 $36.0 $7.6 $90 600 150 108.2x 16.4x 2.7x 10.6x 3.5x 5% 19% 83% PharmaCan Capital MJN-T $0.43 42.6 60.0 $18 $1.0 $1.6 $19 977² 19 -- -- -- -- -- 22% 115% 100% Supreme Pharma SL-C B $0.50 $0.66 117.9 166.3 $77 $2.8 $4.5 $79 100 790 NM 25.9x 3.1x NM 3.6x 22% 52% 24% THC BioMed THC-C $0.30 95.7 114.8 $28 $1.0 $0.8 $28 -- -- -- -- -- -- -- 162% 115% 107% Average (n = 10) $127 $18.6 $4.0 $112 2,324 185 85.6x 20.4x 3.5x 9.4x 4.2x 40% 65% 67% Median $85 1,000 70 85.6x 19.2x 3.1x 10.7x 3.6x 21% 70% 78% ¹ Estimates are Dundee's; adjusted for calendar year-ends ² Attributable based on equity ownership of LP's LSC = Licensed Sales Capacity; B = Buy; N = Neutral; R = Restricted; UR = Under Review Source: Company Reports, FactSet, Dundee Capital Markets DUNDEE CAPITAL MARKETS Page 2
Canopy Growth Corp. (CGC-T) Rating BUY C$ Target $4.75 Shares O/S (MM) 114.4 C$ Close $3.79 Fully Diluted Shares (MM) 122.9 Daniel Pearlstein, Research Analyst 12-month return 25% Basic Mkt. Capitalization ($MM) $433.7 dpearlstein@dundeecapitalmarkets.com Enterprise Value ($MM) $393.5 VALUATION DATA BALANCE SHEET (C$ MM) Year-end March 2015A 2016A 2017E 2018E Year-end March 2015A 2016A 2017E Q4/16 P/E -- -- -- 62.5x Assets: P/CF -- -- 72.4x -- Cash & ST Investments 21.4 15.4 44.9 15.4 EV/EBITDA -- 63.7x 612.9x 24.5x Other Current Assets 7.9 29.4 34.9 29.4 EV/Sales 89.7x 26.7x 9.7x 5.4x Current Assets 29.4 44.8 79.8 44.8 FCF Yield -- -- -- -- PP & E 18.4 44.6 57.8 44.6 Other non-current Assets 0.0 53.9 55.7 53.9 OPERATING STATS Total Assets 47.8 143.4 193.3 143.4 Year-end March 2015A 2016A 2017E 2018E Total Bud Sales (kg) 592 2,032 4,770 7,724 Liabilities: Tweed 324 1,469 3,461 6,300 Current Liabilities 4.5 7.2 11.0 7.2 Bedrocan 269 563 1,309 1,424 Long-term Debt 1.7 3.5 9.2 3.5 Price Per Gram ($/g) 7.41 7.35 6.81 7.04 Other non-current Liabilities 0.2 8.9 7.3 8.9 COGS ($/g) -- 2.87 2.26 2.10 Total Liabilities 6.4 19.6 27.5 19.6 Total Oil Sales (kg) -- 31 604 1,287 Capital Stock 51.7 137.6 184.6 137.6 Price Per Gram ($/g) -- 15.00 15.00 15.00 Retained Earnings -10.3-13.8-18.8-13.8 Oil Gross Margin -- 50% 50% 50% Total Shareholder Equity 41.4 123.8 165.8 123.8 FINANCIAL SUMMARY INCOME STATEMENT (C$ MM) Year-end March 2015A 2016A 2017E 2018E Year-end March 2015A 2016A 2017E 2018E Revenue (MM$) 4.4 14.7 40.7 72.3 Total Revenue 4.4 14.7 40.7 72.3 Gross Profit (MM$) 4.8 21.0 24.9 47.0 COGS -0.5-6.3 15.8 25.3 Gross Margin 110% 143% 61% 65% Gross Profit 4.8 21.0 24.9 47.0 EBITDA (MM $) (3.6) 6.2 0.6 16.1 G&A 5.5 8.2 11.8 14.0 EBITDA Margin -- 42% 2% 22% Sales & Marketing 2.7 5.7 10.1 14.5 Depreciation 0.0 2.3 4.3 5.9 CANOPY VALUATION (C$) EBITDA (3.6) 6.2 0.6 16.1 Target Price Upside EBIT (3.6) 3.9 (3.6) 10.2 7.5x EV/EBITDA Multiple on F2021 C$4.75 25% Interest Expense/Income (0.1) 0.1 0.5 0.6 EBT -3.6 3.8-4.1 9.6 Target Price Sensitivity F2021 EBITDA (C$MM) Taxes 0.0 0.1 0.0 2.5 F2021E EV/EBITDA $60.0 $70.0 $82 $90.0 $100.0 Other -3.8-5.4-1.0-5.1 4.5x $2.25 $2.50 $3.00 $3.25 $3.50 Net Income (Reported) -7.3-1.5-5.0 7.1 5.0x $2.50 $2.75 $3.25 $3.50 $3.75 EPS (Reported) $/sh -0.23-0.02-0.05 0.06 5.5x $2.75 $3.00 $3.50 $3.75 $4.25 Average Shares (MM) 32.2 76.7 105.7 116.3 6.0x $2.75 $3.25 $3.75 $4.25 $4.50 6.5x $3.00 $3.50 $4.00 $4.50 $5.00 CASH FLOW STATEMENT (C$ MM) 7.0x $3.25 $3.75 $4.50 $4.75 $5.25 Year-end March 2015A 2016A 2017E 2018E 7.5x $3.50 $4.00 $4.75 $5.25 $5.75 Net Income (Reported) (9.3) (3.5) (5.0) 7.1 8.0x $3.75 $4.25 $5.00 $5.50 $6.00 Depreciation 0.6 2.3 4.3 5.9 8.5x $4.00 $4.50 $5.25 $5.75 $6.50 Working Capital Changes 2.9 22.7 11.5 (17.4) Other (5.1) (33.9) (5.1) 0.0 Revenue ($MM) and Margin (%) Projections Operating Cash Flow (10.9) (12.4) 5.5 (4.4) $800 70% Operating Cash Flow/sh ($/sh) -0.34-0.16 0.05-0.04 $700 Capital Expenditures 0.0 (10.7) (17.5) (27.5) 60% $600 Other (15.4) (1.5) (1.2) 0.0 50% $500 Investing Cash Flow (15.4) (12.2) (18.7) (27.5) 40% Common Share Dividends 0.0 0.0 0.0 0.0 $400 30% Equity financing & W/O Exercise 45.7 22.4 46.8 20.0 $300 Debt Issue 2.0 0.0 0.0 0.0 $200 20% Debt Repayment (0.1) (2.0) 0.1 0.0 $100 10% Other (1.9) (1.8) (4.2) (2.0) $0 0% Financing Cash Flow 45.6 18.6 42.7 18.0 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E Net Change in Cash 19.4 (6.0) 29.5 (13.9) Medical bud ($MM) Medical oil ($MM) Rec bud ($MM) Cash Balance 21.4 15.4 44.9 31.0 Rec extract ($MM) Gross margin (%) EBITDA margin (%) Free Cash Flow (26.3) (25.6) (13.2) (31.9) Revenue ($MM) Margin (%) Source: Company Reports, FactSet, Dundee Capital Markets DUNDEE CAPITAL MARKETS Page 3
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