Cantor Remains Neutral On Aleafia Health, Lowers Price Target On Sectoral Derating, Sees Value

Canadian cannabis company Aleafia Health (OTCQF: ALEAF) recently disclosed its first-quarter financial results with net revenue of CA$7.06 million ($5.81 million) which is around half the amount the company generated in the same period of the last year, when it reported CA$14.6 million. 

The Analyst: Cantor Fitzgerald’s analyst Pablo Zuanic kept a Neutral rating on Aleafia’s stock while lowering their price target from CA$0.55 ($0.45) to CA$0.50. 

The Thesis: The stock has value and it could reduce the discount if it can “deliver on the implied sales ramp up as it exits 2021,” the analyst wrote in a Friday note. 

Aleafia mostly relies on its bulk wholesale business, which further directly depends on volatile bulk market conditions and the size and timing of the outdoor harvest. Because of this, the total sales figures can “mask underlying trend on the branded side,” Zuanic said. 

The first quarter represented this with total cannabis net sales down 56% sequentially and branded recreational sales improving 22% sequentially.

Zuanic projects there will be advances in both domestic medical and branded recreational cannabis sales, for the exports to notably contribute in the second half of the year and even bigger bulk sales by the fourth quarter. Cantor estimates net sales of CA$68.5 million for the year, which is higher than the FactSet consensus projection of CA$67 million, and up from CA$44.5 million in the previous year. 

The company should reach positive EBITDA by the fourth quarter, added Zuanic. 

Over the last three months, Aleafia’s shares fell 37% compared to a 10% drop for the AdvisorShares Pure Cannabis ETF (ARCA: YOLO). The sectoral derating in combination with missed first-quarter guidance and consensus led to the stock’s notable drop, the analyst explained. 

While Zuanic recognizes the stock’s value, he chooses to stay on the sidelines for now, waiting for the significant ramp-up expected by the third and fourth quarter. 

Price Action: Aleafia’s shares were trading 37% lower at 35 cents per share at the time of writing.

Image Credit: Matca Films