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Stone Fox Capital Advisors is a registered investment advisor founded in 2010. The firm offers portfolio management with a focus on opportunistic stocks providing secular growth trends at an affordable value. An emphasis is placed on fundamental analysis though charts are used for timing entry and exit points. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA. Invest with Stone Fox Capital's model Net Payout Yields portfolio on IB Asset Management as he makes real time trades. The site allows followers to duplicate the model portfolio in their own brokerage accounts. You can find the portfolio and more details here: http://ibkram.com/stone-fox-capital Follow Mark on twitter: @stonefoxcapital

Marijuana Penny Stock Zenabis Global Is a Lottery Ticket


Investing in the cannabis sector is risky in general, but one stock offers a lottery ticket with a good opportunity of paying out. Zenabis Global (ZBISF) has one of the lowest valuations in the sector with the stock trading at $1. The company projects cultivation capacity growth to match some of the industry leaders while the stock valuation is a fraction of the industry leaders.

Cultivation Growth

In Q2, Zenabis Global cultivated 2,473 kg of dried cannabis to nearly double the cultivation in the prior quarter. The company now has 54,000 kg of licensed cultivation capacity after starting the year at next to nothing and only 10,200 kg at the end of Q1 in March.

The below chart is not inclusive as a company like Canopy Growth (CGC) released the harvest of 40,000 kg in the June quarter alone, but the chart provides a solid indication of how Zenabis Global already sits in the middle of the pack in the Canadian cannabis sector.

(Source: Zenabis Global website)

Stocks like recent IPO Sundial Growers (SNDL) and OrganiGram Holdings (OGI) have market caps near $1 billion while Zenabis Global is only worth $200 million. The company has the capital plans in place to reach capacity of 143,200 kg, recently increased by 12,000 kg due to harvests that have consistently exceeded capacity designs.

Zenabis Global has a long-term plan to eventually reach over 470,000 kg of annual cultivation capacity with existing greenhouse facilities built out and converted to cannabis production.

Operational Hiccups

While Zenabis Global continues to exceed capacity targets, the company failed to meet internal Q2 revenue targets. Net revenues doubled sequentially to C$25.0 million, but the guidance was for cannabis revenues between C$10.0 to C$12.0 million. The cannabis segment only generated revenues of C$7.3 million.

The propagation revenues of $18.1 million in the quarter is interesting, but the market will focus mainly on the cannabis revenue portion. The issue was two-fold in the quarter: pricing discounts to obtain market share and an issue with a third-party supplier as the company ramps up cultivation.

Of the 1,720 kg sold in the quarter, Zenabis Global only sold 1,388 kg from their own supply. Another 554 kg had to be rejected. This part of the business isn’t much of a concern as production ramps will eventually lead to the company selling 10x as much kg from their own production.

The one concern is the pricing picture that in a lot of ways is a bigger issue for the market. Zenabis Global saw cultivation cash costs dip to C$0.78 per gram in the quarter with a forecast of the Langley facility dipping to only C $0.50 per gram.

These cash cost levels will allow Zenabis Global to make a solid profit even on the net revenue per gram sold of C$4.22. The price dipped 29% sequentially and will need to stabilize for the lottery ticket to pay off.

Takeaway

The key investor takeaway is that Zenabis Global has the licensed cultivation capacity to reached annual sales of C$200 million with the market cap now around $200 million. The lottery ticket might not pay off, if industry pricing trends down too far, but the stock offers a better risk/reward scenario than paying 10x future sales estimates for other Canadian cannabis stocks.

 

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