1 Comment 1 Commentby Pathfinder Asset Management
Hamesh Sharma
In my last article, I discussed how Xero de-listing from the NZX was a sad day for the local market. So, you would think that when the first IPO in 2-years for the NZX listed the other day it would be a cause for celebration – the last new listing being Oceania Healthcare in May 2017 has meant a long wait. Unfortunately, for NZX investors we are far from impressed by the latest listing on the market, medicinal cannabis company Cannasouth (CBD).
Vodafone had been tabled as the next listing on the market but fell through given it has been bought by Infratil & Brookfield. Vodafone, being a well-known business could have been great in terms of adding much needed liquidity to the market, compared to Cannasouth which we see as a highly speculative investment given it is a pre-revenue and loss-making business.
The NZX has been struggling, with a number of de-listings of quality companies over the past couple of years including Xero, Nuplex, Diligent, and Trade Me to name a few. Has the local market operator become too desperate in its hunt to grow the NZ stock market?
Shares in CBD are down -36% from their IPO price of 50 cents a share. This is not surprising as CBD is an extremely speculative investment which has not generated a dollar of revenue. Further, with the business still trading at a market capitalisation of $32 million the valuation looks eye-watering.
So, what are investors paying for? Firstly, few financial details were made available to the public, and once again the company is in the pre-revenue loss-making stage. The Ministry of Health is reportedly set to release a proposal for what the scheme around the medicinal cannabis sector may look like in the near future, which then will be open for public consultation. It is worth noting that Cannasouth are not looking at entering the recreational market, with their focus being on medical applications. CBD has obtained some licences & has undertaken research & development, although it operates in a developing legal and regulatory environment.
In terms of invested capital, $3.7m looks to have been invested into CBD as share capital pre IPO, with the October 2018 capital raise being performed at a company valuation of $18m. Post IPO, CBD raised $10m, which means total post IPO invested capital for the business is $13.7m. At a $50m IPO valuation, this implies CBD was listed at a ‘price to invested capital’ multiple of 3.6x, basically what a company is valued at versus the amount of money, in cash and assets, that has gone into it. According to research company ShareClarity, at IPO CBD was priced 70-200% higher than later-stage IPOs and 25-100% higher than other established medicinal cannabis companies on the Australian Stock Exchange. By way of comparison, AusCann Group was listed in January 2017 at 2.0x its invested capital and Cann Group was listed in May 2017 at 1.6x its invested capital.
Despite this, there is investor appetite around the sector, and according to the CBD chairman 1454 new shareholders who took part in the IPO process, implying an average holding of $6,800. This is a good time to mention a major flaw in CBD’s IPO structure - there is no escrow to stop major shareholders from dumping their shares. Usually in IPOs there is a commitment for major stakeholders to hold on to their stock for at least 12-months.
We would not think of Cannasouth as being investable until there is more certainty around its ability to generate revenue & returns for investors, and at the very least the business has some viable products to take to market with tangible assets backing the investment. Essentially, we would feel more comfortable with such an investment if it was further developed in terms of its company life cycle.
There are clearly questions around whether this was the best way to break the NZ markets IPO drought, time will tell.
Hamesh Sharma is a portfolio manager at Pathfinder Asset Management, a boutique responsible investment fund manager. This commentary is not personalised investment advice - seek investment advice from an Authorised Financial Adviser before making investment decisions.
Pathfinder is an independent boutique fund manager based in Auckland. We value transparency, social responsibility and aligning interests with our investors. We are also advocates of reducing the complexity of investment products for NZ investors. www.pfam.co.nz
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