After a Challenging March Quarter, Canopy Growth Projects Positive EBITDA by FY 2024

Cantor Fitzgerald’s Pablo Zuanic maintained a “Neutral” rating for Canopy Growth Corp’s stock. WEED CGC and lowered its 12-month price target from $7.75 to C$6.75 due to industry derating and lowered estimates.

the dissertation

According to Zuanic, Canopy’s cost-cutting measures and efforts to spin off value in the domestic recreational sector should help the company achieve its goal of positive EBITDA in fiscal year 2024. However, he noted that “more clarity on the pace of cash burn” would help the cannabis company.

“There was little improvement in FY22 from FY21, and at the current pace, net debt could be a steep 1.6x sales in March 2023 (where, Constellation Brands [STZ/NC] exercising more warrants would help balance sheet despite dilution),’ Zuanic wrote in an analyst note Friday. “Efforts to continue building the U.S. THC ecosystem make sense given private sector valuations, even if they won’t contribute to the income statement for a while.”

In the first quarter of 2022, Canopy recreational sales declined 22% (vs -2% for the market), cannabis-adjusted gross margins were -72% and adjusted EBITDA was -$122 million.

“We remain neutral and question whether the focus on building US assets would have hurt the company in Europe, should markets there legalize before the US,” Zuanic added.

Sales for 4Q 2022

Total revenue of $112 million was below FactSet’s consensus of $130 million. Recreational B2B revenue ($26 million) continued to decline (-22% sequentially versus -2% for the market), as the company tries to step back from the deep discount segment and focus more on the regular and premium segment. B2C sales ($13 million) declined 10% sequentially. Domestic medical sales remained steady at $13 million. Exports were stable in the $9 million range (including $4 million to Israel), while the US CBD declined to $2 million (from $4 million). The C3 unit in Europe was sold mid-quarter, so only $3.1 million in revenue was recorded. Non-cannabis sales declined sequentially ($46 million vs. $58 million), primarily due to seasonality and BioSteel’s pipeline fill in the December quarter.

Profitability and cash flow

Reported gross margins were $159 million negative (due to expenses) on $112 million in revenue, while adjusted gross margin was -32% (-$36 million). Adjusted gross margins for cannabis were -72% (partly due to inventory obsolescence) and 25% for the non-cannabis unit (up from 37% in the previous quarter). Adjusted EBITDA was reported as -$122 million (-109% of revenue vs. FactSet consensus of -52%). Free cash flow was -$127 million with a minimum CAPEX ($64K) in Q4 2022; for fiscal year 2022, the FCF was $582 million.


Canopy ended March with net financial debt of $129 million (cash ($1.37 billion and debt of $1.5 billion), or about 0.3x annualized revenue.

“While the debt is manageable, we wonder how quickly the money will burn, given the lack of meaningful improvement,” Zuanic wrote. “At this rate, net debt at the end of FY23 could be > $700 million (or 1.6x revenue). Asset impairment and restructuring charges in the fourth quarter of 2022 were $241 million and other restructuring charges recorded in COGS were $119 million (the combined expectation for both items as per the 4/26 press release was $350-550 million). “


“The company now expects to be EBITDA positive in FY24 (ex-US investments THC and BioSteel), with trends improving throughout FY23 – prior to this announcement, there was no target date to achieve positive EBITDA. Cost savings announced 4/26/2016 to be achieved within 12-18 months ($30-50 million in COGS and $70-100 million in SGA) should aid these efforts,” Zuanic wrote.

“While we don’t expect all gross savings (33% of top-end revenue) to flow to the EBITDA line, these targets, plus efforts to improve the domestic leisure portfolio’s price mix, should enable better EBITDA trends. in our view,” he said.

“By our calculation, Canopy Growth’s rec share was 5.6% in Q4 2022 (taking into account reported B2B sales and gross profit to retail prices) compared to 9.7% in June qtr of CY21 and 11.9 % for all FY21 (end of March 2021).”

Valuation and price target

Regarding Canopy’s price target, Zuanic said, “We note that US MSOs sell an average of 2.5x the revenue of CY22. For price target purposes, we take 7x the core cannabis sales, resulting in a 12 month price target of C$6, 75 (vs. C$7.75 previously due to lower estimates and industry derating) In our view, future actions Constellation Brands may take could weigh on the stock, we continue to think it would make more sense for STZ to share all Canopy Growth float instead of waiting to pronounce the warrants when they are in the money.”

Image by Ilona Szentivanyi.

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