Company Reports

Shares of Canadian-licensed producers and US multistate operators rallied massively on news that the US Drug Enforcement Administration will proceed with rescheduling cannabis to Schedule III from Schedule I. Schedule I indicates it is considered to have a high potential for abuse and no medical value. In comparison, Schedule III drugs are considered less dangerous, with a lower potential for abuse and having some medical value. We view the April 30 news as the next step in a long process by the Biden administration to relax the current federal prohibition. We view the market reaction as a reflection of how much pressure these stocks have faced rather than any new development.

No-moat Tilray issued disappointing (February-ended) fiscal 2024 third-quarter results, including slower revenue growth and margin contraction. Changes to our forecast alone imply a valuation reduction roughly in line with the ensuing market price decline of about 21%. In addition, we’ve removed all contribution to our fair value estimate from Tilray’s ownership of US multistate operator Medmen’s senior secured convertible notes, as a complete write-off of the investment seems inevitable. The asset had composed about 20% of our fair value estimate. Thus, due to these two factors, we are cutting our fair value estimates to $2/CAD 2.70 from $3.10/CAD 4.20. As reflected in our Very High Uncertainty Rating, changes to our forecast can have dramatic effects on our fair value estimates, especially as Tilray has yet to achieve positive free cash flow. Shares trade close to our updated fair value estimates.

Tilray cultivates and sells cannabis in Canada and exports into the global medical market. It also sells CBD and alcohol. The company is the result of legacy Aphria acquiring legacy Tilray in a reverse merger and taking the target name in 2021.

The Bundestag, the lower house of Germany’s legislature, passed a cannabis bill last month that would allow possession of up to 25 grams and home-growing of up to three plants. The law will become effective April 1 as planned after the Bundesrat, the upper house, voted not to send it to mediation committee on March 22. The law expands on July 1 to allow nonprofit cannabis grow clubs of up to 500 members and 50 grams per member.

Tilray cultivates and sells cannabis in Canada and exports into the global medical market. It also sells CBD and alcohol. The company is the result of legacy Aphria acquiring legacy Tilray in a reverse merger and taking the target name in 2021.

Based on our initial review of no-moat Tilray’s fiscal second-quarter results, we expect to trim our full-year revenue forecast by a mid-single-digit percentage. This is mostly due to slightly slower cannabis revenue growth than we expected as Canada remains overcrowded with licensed producers. This should lead to a mid-single-digit percentage reduction in our fair value estimates of $3.30 and CAD 4.50 per share. As reflected in our Very High Uncertainty rating for the company, changes to our forecasts can have dramatic effects on our fair value estimates. Tilray has yet to achieve positive free cash flow and the potential for equity dilution to fund cash burn underpins the risk that drives our uncertainty rating.

Tilray cultivates and sells cannabis in Canada and exports into the global medical market. It also sells CBD and alcohol. The company is the result of legacy Aphria acquiring legacy Tilray in a reverse merger and taking the target name in 2021.

We are placing no-moat Tilray under review as we may reduce our $5.50 and CAD 7 per share fair value estimates by as much as 30% to 40%. We reiterate our Very High Uncertainty Rating as Tilray has yet to achieve positive free cash flow and faces the risk of equity dilution to fund continuing cash burn. Given its lack of cash flow, changes to our estimates can have dramatic effects on fair value estimates.

On Aug. 30, shares of the U.S. cannabis multistate operators rallied around 20%, with Canadian licensed producers up less, following news that the U.S. Department of Health and Human Services recommended to the Drug Enforcement Administration that it reclassify cannabis to a Schedule III drug from Schedule I. Cannabis, along with heroin and ecstasy, is currently listed as Schedule I, which means it is considered to have a high potential for abuse and no medical value. Schedule III drugs are considered less dangerous, with a lower potential for abuse and having some medical value. Lower scheduling would not necessarily be a panacea for the cannabis industry, but it could be enough to bring some important benefits to U.S. multistate operators, including paying normal tax rates, improved banking access, and potential listing on a major U.S. stock exchange.

No-moat Tilray announced the acquisition of eight craft brewery brands from beer giant Anheuser-Busch. Although few details were provided, shares skyrocketed an astounding 36% on the news. As we do not have enough information to incorporate the beer additions in our model, we cannot justify the market reaction. Indeed, we don’t plan to change our fair value estimates of $5.50 and CAD 7 per share until further information is released. We think there are few synergies across beer and cannabis but do think that additional profitable businesses could help the company scale overhead expenses. Even excluding the beer additions, shares still look undervalued for the only profitable Canadian cannabis licensed producer we cover.

Tilray cultivates and sells cannabis in Canada and exports into the global medical market. It also sells CBD and alcohol. The company is the result of legacy Aphria acquiring legacy Tilray in a reverse merger and taking the target name in 2021.

No-moat Tilray surprised us in its May-ended fourth quarter with net revenue of $184 million and adjusted EBITDA of $22 million. In comparison, our full-year forecast implied $156 million and $14 million, respectively, with its cannabis, beverage, and distribution segments outperforming our expectations. The solid results also seemed to surprise the market, with shares up 15% after the release. Still, due to slightly weaker guidance than our forecast and expected dilution from refinancing pending maturities of convertible debt, we expect to lower our fair value estimates of $6.50 and CAD 9 per share by midsingle digits.

On May 25, no-moat Tilray issued $150 million of 5.2% unsecured convertible senior notes, with another $22.5 million possible for over-allotments. The proceeds will be used to partially refinance near-term maturities of the 5% convertible senior notes due 2023 and 5.25% convertible senior notes due 2024, of which $223 million and $138 million, respectively, were outstanding at the end of the fiscal third quarter.

In its third fiscal quarter, no-moat Tilray again suffered from tough Canadian market conditions, plagued by pricing pressures amid too many licensed producers, or LPs, and a stalwart illicit market. Net cannabis revenue grew marginally compared with the second quarter but is about 7% lower year to date compared with the prior-year period. We’ve lowered our full-year fiscal 2023 net revenue forecast about 2% from our prior forecast to $598 million.

Tilray cultivates and sells cannabis in Canada and exports into the global medical market. It also sells CBD products in the United States. The company is the result of legacy Aphria acquiring legacy Tilray in a reverse merger and renaming itself Tilray in 2021.

We’ve lowered our fair value estimate for Tilray to $8 and CAD 10, from $12 and CAD 16, respectively, following slower growth in the Canadian market than we expected during its fiscal second quarter. Net revenue growth declined 6% sequentially and 7% year on year primarily from cannabis. Even excluding currency headwinds, net revenue still declined 5% sequentially and grew just 2% year on year. Also, fierce competition in the crowded Canadian market continues to weigh on prices, also contributing to top-line headwinds. Despite cost initiatives, adjusted EBITDA decreased 13% sequentially and 15% year on year to about $11.7 million. Despite our cut, no-moat Tilray’s shares remain undervalued and well-positioned in the challenging Canadian market.

Tilray cultivates and sells cannabis in Canada and exports into the global medical market. It also sells CBD products in the United States. The company is the result of legacy Aphria acquiring legacy Tilray in a reverse merger and renaming itself Tilray in 2021.

Tilray’s first-quarter fiscal 2023 result continued its now 14-quarter long streak of positive adjusted EBITDA. With our long-term forecast largely remaining intact, we maintain our $12 U.S. dollar-denominated fair value estimate for no-moat Tilray. Our Canadian dollar-denominated fair value estimate rises to CAD 16 per share from CAD 15 on the stronger U.S. dollar. While Tilray shares soared in response to President Biden’s move to pardon federal marijuana possession offenses, Tilray continues to screen as deeply undervalued. Trading in 5-star territory, we view the current share price as an attractive entry point as the Canadian licensed producer closes in on sustainable positive free cash flow generation.

Tilray cultivates and sells cannabis in Canada and exports into the global medical market. It also sells CBD products in the United States. The company is the result of legacy Aphria acquiring legacy Tilray in a reverse merger and renaming itself Tilray in 2021.

President Joe Biden’s comments on cannabis legalization spurred a rally in the cannabis sector on Oct. 6. His major announcement was that all prior federal offenses of simple marijuana possession will be pardoned. The act is expected to affect approximately 6,500 people convicted from 1992 to 2021. Additionally, Biden called upon governors to take similar action toward pardoning possession offenses. More importantly for the legal cannabis industry, he plans to direct the Department of Health and Human Services and attorney general to review the product’s status as a Schedule 1 controlled substance, which places it among heroin and LSD and higher than methamphetamine and fentanyl.