- profitable, growing (+29% revenue in Q1, margins growing with economies of scale)
- low cost structure, in part due to low cost power in Quebec
- production limited not demand limited with lots of room to grow production (can't even meet demand in Canada...yet)
- R&D vision that is looking for 'unicorns', new product that commands a premium in the market
- >50% insider ownership, including several Montreal family offices. Cannara has to be run well, for the shareholders, as the investors have the will and capacity to keep them on track.
- hit 'rule of 40' [revenue growth plus free cash flow margin] of 49 last quarter and is likely to sustain this, yet trades at ~PE11
For Cannara, given their low cost structure, the high excise tax is a benefit as it hurts their competitors more than it hurts them. This is letting Cannara grow production and take over the Canadian market as fast as they grow production. Once they dominate in Canada they will then go for the high margin international business.
From a 1st pass of Cannara recently so many things looked great. Their increasing market share in some provinces was and eye opener. It was only their debt that gave me pause. What’s your thoughts on this? and do you know if they have ever voiced their intentions around their debt, desired levels going forward etc?
The debt appears high at first glance, but given it's secured against the real estate assets (which are worth $100M+), it doesn't worry me at all. They just announced extensions on their debt earlier this week. I think the #1 capital allocation priority is opening up more grow rooms to support organic growth. Then, I would expect the excess free cash flow generation to go towards debt repayment over time.
I fully agree. To add to that, now that Cannara is reliably and significantly cash flow positive, they are easily able to handle the debt and it is no longer a risk.
Cannara has a term loan of $34.5M due in 2042 and $6.6M in convertible debentures. In the last quarter, cash flow from operations was $5.8M, interest on the term loan was $871K and $491K was paid against the principal. In addition to interest, Cannara will need to pay an additional $1.9M of the principle in the next twelve months. They have the cash flow to easily do this. Of course, as they pay down the term loan the interest payments will also decline.
The convertible debentures are effectively owned by the CEO, expire on March 31, 2028 and convert into stock at $1.80/share. To avoid the dilution, Cannara can opt to pay cash when the notes come due. Rather than paying interest, Cannara is letting the interest accumulate. In the highly unlikely event that their stock price is below $1.80 in 2028, they'll just dilute to pay the debentures. Otherwise, they have the capacity to repay the debentures plus accumulated interest.
Duane, where does the 2042 term come from? They announced this week an extension of the term loan to December 2027. And the convertible debenture is held by Olymbec (the other major shareholder), not the CEO. Other than that, I agree with your analysis of the cash flows and low level of risk from a debt perspective!
I was mistaken, you are correct. The term loan is based on 20 year amortization (hence the ongoing principle repayments), however it is due on December 31, 2025. Though not a certainty, clearly the lender intended to renew the loan if it remained a good risk.
Given that it is secured with Cannara real estate (the grow facilities), which is worth far more than the amount of the loan, and that Cannara is in far more certain shape financially than it was in 2022 when it negotiated the loan, there should be no issues renegotiating the loan, likely at better terms, prior to the loan coming due.
Once again, you are correct. That is the difference in attention between actually owning the stock instead of watching with interest! My intention is to buy in the weaks prior to their next earnings, or on weakness.
Cannara's CFO is doing an excellent job, renewing the loan prior to the end of the quarter to eliminate the shock of seeing $32M in current liabilities suddenly appear on the balance sheet.
I'm a little puzzled as to why Cannara felt the need to hire IR and market making services. The cost is very low, so perhaps it was time to begin the process of behaving like a larger company. However, if the story is that the return on free cash flow is greatest in investing in expanded production, why spend free cash flow on IR and market makers? Given the level of insider holdings, for now they can basically ignore their stock price and focus on growing the business.
Agreed on most of the analysis in the comments, though I wouldn't chase it now if you don't already own it as it has gone up significantly in the last 2 months (2x). Idem for Avant Brands, which I prefer though as it has a tenth of the market cap (but is of course riskier).
You wouldn't chase it because you think the valuation is expensive at the current level or more from a technical standpoint (expecting a short-term pullback)?
Thanks for the questions! I'm far from an expert on international markets. However, as mentioned in the post, you can clearly see that exports have been picking up lately based on the financial results of some of the Canadian LPs.
If supply becomes very tight, how much cultivation capacity comes back online, and how quickly? It's hard to tell at this point. But yes, another period of oversupply could happen down the road. I'd be surprised if it happened anytime soon.
I fully agree on Cannara:
- profitable, growing (+29% revenue in Q1, margins growing with economies of scale)
- low cost structure, in part due to low cost power in Quebec
- production limited not demand limited with lots of room to grow production (can't even meet demand in Canada...yet)
- R&D vision that is looking for 'unicorns', new product that commands a premium in the market
- >50% insider ownership, including several Montreal family offices. Cannara has to be run well, for the shareholders, as the investors have the will and capacity to keep them on track.
- hit 'rule of 40' [revenue growth plus free cash flow margin] of 49 last quarter and is likely to sustain this, yet trades at ~PE11
For Cannara, given their low cost structure, the high excise tax is a benefit as it hurts their competitors more than it hurts them. This is letting Cannara grow production and take over the Canadian market as fast as they grow production. Once they dominate in Canada they will then go for the high margin international business.
That's an excellent summary!
From a 1st pass of Cannara recently so many things looked great. Their increasing market share in some provinces was and eye opener. It was only their debt that gave me pause. What’s your thoughts on this? and do you know if they have ever voiced their intentions around their debt, desired levels going forward etc?
The debt appears high at first glance, but given it's secured against the real estate assets (which are worth $100M+), it doesn't worry me at all. They just announced extensions on their debt earlier this week. I think the #1 capital allocation priority is opening up more grow rooms to support organic growth. Then, I would expect the excess free cash flow generation to go towards debt repayment over time.
Thank Mathieu, much appreciated.
I fully agree. To add to that, now that Cannara is reliably and significantly cash flow positive, they are easily able to handle the debt and it is no longer a risk.
Cannara has a term loan of $34.5M due in 2042 and $6.6M in convertible debentures. In the last quarter, cash flow from operations was $5.8M, interest on the term loan was $871K and $491K was paid against the principal. In addition to interest, Cannara will need to pay an additional $1.9M of the principle in the next twelve months. They have the cash flow to easily do this. Of course, as they pay down the term loan the interest payments will also decline.
The convertible debentures are effectively owned by the CEO, expire on March 31, 2028 and convert into stock at $1.80/share. To avoid the dilution, Cannara can opt to pay cash when the notes come due. Rather than paying interest, Cannara is letting the interest accumulate. In the highly unlikely event that their stock price is below $1.80 in 2028, they'll just dilute to pay the debentures. Otherwise, they have the capacity to repay the debentures plus accumulated interest.
Duane, where does the 2042 term come from? They announced this week an extension of the term loan to December 2027. And the convertible debenture is held by Olymbec (the other major shareholder), not the CEO. Other than that, I agree with your analysis of the cash flows and low level of risk from a debt perspective!
I was mistaken, you are correct. The term loan is based on 20 year amortization (hence the ongoing principle repayments), however it is due on December 31, 2025. Though not a certainty, clearly the lender intended to renew the loan if it remained a good risk.
Given that it is secured with Cannara real estate (the grow facilities), which is worth far more than the amount of the loan, and that Cannara is in far more certain shape financially than it was in 2022 when it negotiated the loan, there should be no issues renegotiating the loan, likely at better terms, prior to the loan coming due.
It was already extended to 2027 on the same terms (see press release from a few days ago).
Once again, you are correct. That is the difference in attention between actually owning the stock instead of watching with interest! My intention is to buy in the weaks prior to their next earnings, or on weakness.
Cannara's CFO is doing an excellent job, renewing the loan prior to the end of the quarter to eliminate the shock of seeing $32M in current liabilities suddenly appear on the balance sheet.
I'm a little puzzled as to why Cannara felt the need to hire IR and market making services. The cost is very low, so perhaps it was time to begin the process of behaving like a larger company. However, if the story is that the return on free cash flow is greatest in investing in expanded production, why spend free cash flow on IR and market makers? Given the level of insider holdings, for now they can basically ignore their stock price and focus on growing the business.
Agreed on most of the analysis in the comments, though I wouldn't chase it now if you don't already own it as it has gone up significantly in the last 2 months (2x). Idem for Avant Brands, which I prefer though as it has a tenth of the market cap (but is of course riskier).
You wouldn't chase it because you think the valuation is expensive at the current level or more from a technical standpoint (expecting a short-term pullback)?
Technical standpoint (idem for Avant Brands), I would prefer a short term pullback (and lower RSI).
The question to ponder is Does one expect weed and gummy consumption to go up or down or hold while expenses grow
Can you find a profitable distributor that has over seas rights
Are over seas markets beginning to open up
Does the industry go berserk again and over produce ??? There are definitely some interesting valuations in this sector.
Thanks bud subscribed !!
Thanks for the questions! I'm far from an expert on international markets. However, as mentioned in the post, you can clearly see that exports have been picking up lately based on the financial results of some of the Canadian LPs.
If supply becomes very tight, how much cultivation capacity comes back online, and how quickly? It's hard to tell at this point. But yes, another period of oversupply could happen down the road. I'd be surprised if it happened anytime soon.