Zenabis Global (ZBISF) has large global cannabis aspirations, but the company also has a balance sheet that doesn’t match the size of their aspirations. When the cannabis market was strong, the risk to investors was low. The market shift has the investor focus far away from the ability of the company to expand operations with the biggest questions now shifting to whether the company has the cash to build the empire.
August Corporate Update
Zenabis is one of the cannabis companies that was late to the cannabis market, but the company has huge plans to take on the large global cannabis companies in Canada. The Vancouver-based company has gone from limited monthly production to start the year to 1,996 kg of production just in August alone.
The company has easily beaten revised capacity goals all this year. The current forecast has Zenabis reaching production of 3,758 kg in October and 5,199 kg in November.
At this point, the market will start realizing the company as a legitimate cannabis producer being on target to top 15,000 kg of production in the December quarter. Noteworthy is that Aurora Cannabis only generated 15,590 kg of cannabis in the March quarter. Zenabis is only a few quarters behind the production rate of the biggest in the industry.
The company is on path to licensed production of 96,400 kg once obtaining approval for the increased capacity at Zenabis Langley. Management forecasts the existing capital plan allowing for production capacity to reach 143,200 kg of dried cannabis. The long-term goal is to reach production capacity of nearly 500,000 kg once the existing facilities are fully built out. The good news here is that Zenabis hasn’t aggressively entered into plans to build out these operations already.
The stock trades at $0.66 likely due to the recent financing disclosed with a 25.8% annualized all-in cost of financing or possibly investors still aren’t familiar with the production plans of the small company. The stock has a listed market valuation of only $150 million despite revenue estimates of $220 million in 2020 that appear very low for a company after reporting C$25 million in Q2 revenues and a serious ramp up in production already in the process.
The biggest question has turned to the cost of financing the operations. Zenabis entered the quarter with $8.7 million in cash on the balance sheet. The company raised $25.0 million back in August at a very high cost. In addition, the pre-paid supply agreements add another $40.0 million in cash.
The total cash position including another equate to ~$74 million in available cash. The biggest question for Q3 is whether the company can cut the cash burn to a reasonable amount to reach cash flow positive quicker considering the financing options now aren’t very appealing.
The company now has over 270 million shares outstanding following the additional cost of the financing. The fully diluted market value is only $180 million even after the extra costs of the debt deal.
Zenabis Global has a small, but vocal camp of bullish analysts with positive expectations for its stock. Two analysts polled by TipRanks rate the stock a Buy. With a return potential of 350%, the stock's 12-month consensus price target stands at $2.72.
The key investor takeaway is that Zenabis Global continues full speed ahead with massive production and cultivation growth. Due to high cost debt, the company must shift to generating cash flows from these growing operations before building the large cannabis empire. The stock is cheap, if the company can avoid needing any further financing until the market improves.