Cantor Fitzgerald analyst Pablo Zuanic downgraded his rating on two Canadian cannabis stocks, Auxly Cannabis Group Inc. (TSXV:XLY) (OTCQX:CBWTF) and Fire & Flower Holdings Corp. (OTCQX:FFLWF) (TSX:FAF).
Auxly Cannabis
Year to date, Auxly’s stock dropped nearly 59%. Zunic downgraded the company’s stock from Overweight to Neutral. He also lowered its price target from CA$0.20 to CA$0.08 ($0.06), to address reduced estimates and a lower multiple used.
According to the latest Hifyre data, Auxly continues to lose market share in both vape and flower segments. A decline in sales, combined with price slashing, “does not bode well for profitability,” Zuanic said.
Auxly recently amended and restated its unsecured convertible debentures issued under its standby facility with an institutional investor, which allows it to secure up to CA$25 million in financing. Through 2020, the company sold $11.25 million in original convertible debentures over five tranches.
To postpone the payment of convertible debt worth CA$8.75 million, the company issued to the bondholder some CA4.35 million shares, alongside 20 million warrants, while lowering the conversion price on the debt to CA$0.1380.
Following the repayment of CA$1.25 million, Auxly has extended the maturity date for the balance of the CA$7.5 million principal amount until August 15, 2024.
“The heavy debt load and likely equity-holder further dilution, combined with worsening scanner trends prompt us to downgrade our rating to Neutral,” the analyst said.
Fire & Flower
Meanwhile, Zuanic said that the Canadian cannabis retailer Fire & Flower had taken some “draconian measures on the pricing front,” in an attempt to capture the market share, joining its industry peers such as Canopy Growth Corp. (TSX:WEED) (NASDAQ:CGC) and Aurora Cannabis Inc.(NASDAQ:ACB).
The company’s pricing strategy led to the alignment of prices with those of its competitors, such as High Tide Inc. (NASDAQ:HITI), but below prices set by Nova Cannabis Inc. (TSX:NOVC) (OTCQB:NVACF) and Ontario Cannabis Store online store.
“Given heightened competitive challenges and further potential shareholder dilution down the road, we now prefer to rate the stock Neutral,” Zuanic said.
The analyst downgraded his rating on the company’s stock from Overweight to Neutral, while lowering the 12-month price target to CA$2.60 from CA$9.5.
On the other side, the company’s strategy also includes partnerships with Circle K, a convenience store giant that has a multibillion-dollar market cap under the company Alimentation Couche-Tard, and Zonetail Inc as well as expansion of delivery capacities through Firebird Delivery in Ontario and Pineapple Express Delivery in British Columbia.
“We appreciate Fire & Flower’s asset-light strategy, prudent brick & mortar growth plans, its inroads in tech services and delivery, and the strategic benefits of the partnership with Circle-K,” the analyst said.
CBWTF Price Action
Auxly’s shares traded 0.65% lower at $0.0615 per share during Monday morning session.
FFLWF Price Action
Fire & Flower’s shares traded 2.36% lower at $1.65 per share during Monday morning session.
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