Date : 28/01/2021

Epsilon Healthcare (Formerly, THC Global Group)

ASX :

EPN

Market Cap : $44.52 Million

Buy

52 Week Range : $0.18 - $0.46

Share Price : $0.235

A speculative "Buy" on a stock that looks set to take advantage of the tailwinds in the cannabis market.

Company Analysis

Epsilon Helathcare, formerly – THC Global Group Ltd/The Hydroponics Company Ltd., is an Australia-based company, which is engaged in the business of cannabis. The Company is engaged in the development and delivery of medicinal cannabis. The Company also manufactures and distributors of hydroponics equipment, materials, and nutrients. The Company is also engaged in hydroponic greenhouse design and construction. The Company also offers various products, such as Payload Extraction Bags; DigiLume Lighting; Quick Flips Relays; Spin Pro Trimmers; Wind King Fan; Nanolux Ceramic Metal Halide; Elemental Controls, and The Rack Drying System. Its Quick Flips are a patent-pending lighting relay. The interlocking modular design allows the user to build custom flip boards in any combination. Its Spin Pro Trimmers is used for the removal of protruding leaves and roots, for the preparation of plants for essential oils. Its Elemental Controls provide premium temperature control for commercial hydroponic systems.


Source: Tradingview.com

Catalyst

Medical cannabis industry sector to reach 30K Million by 2026 at +13% CAGR:

The medical cannabis sector is segmented into two segments, Tetrahydrocannabinol (THC) and Cannabidiol (CBD) for the treatment of pain, arthritis, and neurological disease such as epilepsy. The actual valuation of the global medical cannabis market is estimated at 12,800M in 2020 and is expected to triple by the end of 2026 according to Valuates Reports (2020). The main growth driver is the general acceptance and legalisation of medical marijuana and an increase in the demand for cannabis in medical applications.

Medical reports suggest symptomatic benefits for a growing number of patients from the application of medical cannabis-derived from cannabinoids THC and CBD over the last 10-year. Medical cannabis market share in Europe is projected to become the largest with the legalisation of medicinal use in Germany in 2017 that created a domino effect over in the Eurozone which is beneficial for THC that seek for a global reach and distribution of its products.

THC’s growth strategy to follow the global adoption of the medical cannabis market:

We believe THC company’s strategy to move toward a diversified and vertically integrated structure will be beneficial for the firm in the long run to tackle the growth in demand for medicinal cannabis. The company has repositioned its business towards 6 major segments, (1) Licensed and permitted Australian TGA and EU GMP bio -floral extraction facility, (2) Cannabis medicines, (3) Healthcare clinics, (4) Medimar, an e-commerce platform that connects patients, pharmacies, and prescribers to streamline the distribution channel, (5) cultivation solutions, hydroponic equipment for wholesalers and retailers, and (6) Cannabis retailing licensed in Canada.

THC shift its business model toward healthcare and pharmaceuticals:

The company is on the pathway towards monetisation of its manufacturing facilities in Southport and exhibit the capability to gain traction in the Pharmaceutical manufacturing and healthcare services sectors. The repositioning of the company combined with global acceptance, positive policy and accommodative legislative stance in the U.S. and the UN set the company to become a global player in the export of TGA and EU GMP medicinal cannabis medicines.

Risk Consideration

THC Global may be exposed to risks arising from the company use of financial instruments to support and develop its business operations. We have recognised the following risk that can significantly impact on the performance of the company:

  • Market risk
  • Interest rate risk
  • Foreign Exchange risk
  • Credit risk
  • Liquidity risk

Key Financials

Revenue growth in line with medicinal cannabis industry sector growth.

Recently, THC started a new strategy to improve its revenue and gross margin with higher-yielding plant genetics and taking advantage of the existing facility with licenses and permits for cultivation solutions contract offering to save partners time and cost. In our projection, we are anticipating a growth in the company’s revenue aligned to the medicinal cannabis market growth at 19% CAGR. We estimate the gross profit to improve as THC scales.

The total loss incurred after taxes by THC has been in the $11 million range for 2 years now. The total operating expenses stand at $12.5 million. These numbers show that it is a long road to profitability for THC.

THC toward profitability with these 5 approaches:

  1. Reduction of run rate
  2. Focus on sustainable revenue
  3. Development of cultivation solutions
  4. Divestment of non-core activities
  5. Tetra growth (THC’s acquisition A$3M FY2020-Q1)

THC had identified and implemented over A$ 3 million in annualised run-rate savings in parallel of a revised approach to focus on sustainable revenue growth regarding the Australian cannabis activities. Part of the company new strategy is the development of cultivation solutions which exceeded FY2019 A$ 4.9 million by FY2020-Q3. We believe THC is on the right track to continue to grow along with the anticipated growth of the cannabis market.

The Balance Sheet of THC shows strength. The cash position is just over $9 million. THC carries $4.8 million of debt, and this puts the firm in a positive net cash position of $4.2 million. Current assets come in at $12.7 million and they exceed the current liabilities by 6x – indicating sound financial health in the short term. In the long term, total assets exceed total liabilities by 3.7x and there are no red flags raised as far as financial health is concerned.

Technical Analysis

Trend

THC lost -79.6% since its all-time-high in late 2017. THC is now at around A$ 23.5 cents a share holding a critical long-term multi-year support level. A support level that has been tested throughout the last three and a half year since its IPO. The A$23.5 cents level represents a strategic level that support the price from falling below its all-time low and offers a potential buy opportunity for a prospective rebound. A rebound that match with the company’s strategic plan for growth and the beginning of the company’s monetisation. We believe a bounce back may happen in 2021 and may push the price back to its multi-year level at A$ 44 cents. The $A 44 cents level plays an important role as a tipping point area. If THC price action breaks this level, the next resistance will be at A$ 58 cents.

Key price levels

Key price level to monitor is the multi-year level at A$ 23.5 cents per share that acts as the immediate support level. On the upside, the next resistance sits at A$ 43 cents, then $A 58 cents

Trade consideration

  • Market participants might be interested to enter at key support level: A$ 23.5 cents
  • Primary target price above $A 69 cents per share
  • Secondary target price at $A 1.0 per share
  • Consider reducing exposure below A$ 20 cents
  • It is recommended exiting the trade below A$ 17.5 cents

Recommendation

We are issuing long-term investors a speculative “Buy” on THC as we believe THC has the capabilities to position itself for growth in line with the expansion and global adoption of the medical cannabis market.

 

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