Canopy Growth’s debt plan fails to sway analysts’ sell ratings

Staff work in a marijuana grow room that can be viewed at the new visitors center at Canopy Growth’s Tweed facility in Smiths Falls, Ont., in 2018.Sean Kilpatrick/The Canadian Press

Analysts have maintained their sell ratings on Canopy Growth Corp.’s WEED-T shares despite the cannabis producer’s move late last week to offload nearly one-fifth of its debt to address investor concerns.

After markets closed on June 29, Canopy said it had made a deal with several of its debt-holders to exchange $255.4-million worth of debt for shares and about $3-million in cash as part of its efforts to become profitable by 2024.

In the days since the announcement, analysts from Canaccord Genuity CF-T, CIBC Capital Markets and Piper Sandler & Co. have all reiterated their sell ratings for the stock, the price of which fell nearly 20 percent to a five-year low of $3.55 on June 30. The shares closed up slightly at $3.63 on the Toronto Stock Exchange on Monday.

Swapping the debt for equity increases Canopy’s total outstanding share count by 56 to 78 million shares, up to about 20 percent, according to Canaccord Genuity Group analyst Matthew Bottomley.

This is bad news for current investors, he said, who worry that with more debt remaining on the books, more share dilution may be on the horizon.

While the reduction of debt is positive, Mr. Bottomley said, it’s not enough for the investment firm to upgrade its sell recommendation to hold or even buy.

In a note, CIBC Equity Research analyst John Zamparo said the deal was positive in that it reduced about 17 percent of the company’s debt. However, he noted, Canopy has lost market share in Canada over the past 12 months, while its German operations face increased competition and its US operations are stalled by federal legislation in that country.

Canopy’s story is representative of the bleak financial situation of all Canada’s large cannabis producers, whose profitability is suffering because of high competition for products and low brand recognition. Meanwhile, slow progress towards legalization in the United States is hampering expansion plans.

Cannabis companies account for three of the five worst-performing stocks in the S&P/TSX Composite Index this year-to-date as of June 30, according to S&P Global Market Intelligence. The price of Aurora Cannabis Inc. ACB-T stock is down 75.2 percent year to date, Canopy is down 66.8 percent and Tilray Brands Inc. TLRY-T is down 55.2 percent. Only Shopify Inc. SHOP-T performed worse than Aurora, with a stock decline of 77.2 percent.

As part of Thursday’s debt deal, Constellation Brands Inc. STZ-N, which is also one of Canopy’s largest shareholders, will acquire up to 30.7 million shares, which would bring its total ownership to more than 40 percent.

mr. Bottomley said he remains hopeful for Canopy’s future based on its strategic partnerships abroad, but is watching to see how the company progresses towards conserving cash and streamlining operations. Currently, Canopy is burning more than $100-million in cash per quarter, according to CIBC Equity Research.

“Reducing the debt is one thing, but if you continue to operate at these extended losses, then you’re not really getting anywhere – it’s one step forward, two steps back,” Mr. Bottomley said.

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