Abacus reported revenue of US$15.5m in 2019, up 81.8% year-on-year. CBD CLINIC sales were US$11.7m, up 39.6% compared to 2018, and CBDMEDIC sales were US$3.7m. CBDMEDIC sales for Q419 were US$1.5m, up 28.8% compared to Q319. Given the company’s strong growth and topical product line, in March, CBD industry leader Charlotte’s Web agreed to acquire the company in an all-share deal where Abacus shareholders will receive 0.85 of a common share of Charlotte’s Web for each Abacus share held (C$5.58 per share based on current prices).
Written by
Abacus Health Products |
Strong 2019 growth |
Financial update |
Pharma & biotech |
30 April 2020 |
Share price performance
Business description
Next events
Analysts
Abacus Health Products is a research client of Edison Investment Research Limited |
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Abacus reported revenue of US$15.5m in 2019, up 81.8% year-on-year. CBD CLINIC sales were US$11.7m, up 39.6% compared to 2018, and CBDMEDIC sales were US$3.7m. CBDMEDIC sales for Q419 were US$1.5m, up 28.8% compared to Q319. Given the company’s strong growth and topical product line, in March, CBD industry leader Charlotte’s Web agreed to acquire the company in an all-share deal where Abacus shareholders will receive 0.85 of a common share of Charlotte’s Web for each Abacus share held (C$5.58 per share based on current prices).
Year end |
Revenue (US$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/18 |
8.5 |
0.6 |
0.04 |
0.0 |
N/A |
N/A |
12/19 |
15.5 |
(17.7) |
(0.90) |
0.0 |
N/A |
N/A |
12/20e |
29.2 |
(6.5) |
(0.29) |
0.0 |
N/A |
N/A |
12/21e |
78.3 |
22.1 |
0.75 |
0.0 |
6.3 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Acquisition by Charlotte’s Web expected to close Q2
In March, CBD industry leader Charlotte’s Web agreed to acquire Abacus. The transaction is expected to close in Q2, if passed following an Abacus shareholder vote at a special meeting (scheduled for 4 June 2020) and regulatory approvals.
CBDMEDIC continues to grow briskly
CBDMEDIC full-year sales were US$3.7m. CBDMEDIC sales for Q419 were US$1.5m, up 28.8% compared to Q319. Purchase orders received in Q4 increased the number of retail locations carrying CBDMEDIC products to over 8,000. The nationwide footprint of the retail pharmacy chains that have contracted with Abacus totals 34,500 stores, so the number of locations that offer CBDMEDIC should continue to climb as it is more fully deployed.
CBD CLINIC sales up 39.6% in 2019
CBD CLINIC, which is marketed to healthcare practitioners, continued to grow strongly in 2019 with sales up 39.6% for the year to US$11.7m, although Q419 sales were flat year-on-year and from Q319. CBD CLINIC increased its penetration over the quarter and is now sold in over 16,500 health-related practitioner offices, up by 2,500 over the quarter. However, as many of these healthcare practitioners may have closed offices in response to the coronavirus pandemic, CBD CLINIC sales will likely be soft over the coming quarters.
Valuation: 14.9% discount to acquisition price
Due to the pending acquisition by Charlotte’s Web, we are suspending our valuation for Abacus. As part of the transaction, Abacus shareholders will receive 0.85 of a common share of Charlotte’s Web for each Abacus share held (worth C$5.58 per share based on current share prices) indicating a 14.9% discount at current trading levels.
Full year results
Abacus reported a very strong 2019 as sales increased by 81.8% compared to 2018, to US$15.5m, thanks to expanding footprints for both CBD CLINIC and CBDMEDIC. CBD CLINIC (up 39.6% for the year to US$11.7m) is increasing its penetration and is now sold in over 16,500 health-related practitioner offices, up from around 14,000 the previous quarter. According to the Bureau of Labor Statistics, there are over 500,000 licensed chiropractors, acupuncturists, massage therapists and physical therapists practising in the United States so there is plenty of room for the brand to grow in these target markets past the current 16,500. Over the coming quarters, however, as many of these healthcare practitioners may have closed offices in response to the coronavirus pandemic, CBD CLINIC sales will likely be soft.
CBDMEDIC (US$3.7m in 2019 sales, up considerably compared to the US$0.1m in 2018) has expanded to the top three pharmacy chains (which based on store counts are CVS, Walgreens and Rite-Aid according to IQVIA), with a total of 8,000 locations having ordered CBDMEDIC products as of the end of the year. In order to help with its consumer health footprint, in February, Abacus agreed to purchase Harmony Hemp, which sells topical analgesics, beauty, health and wellness products, for US$5.5m in cash and stock, payable over 24 months. Importantly, Harmony Hemp products can be found in approximately 4,000 major grocery chains and drugstores, increasing the total reach of Abacus products to 12,000 locations. The company is currently targeting 20,000 locations by the end of the year. It is unclear what impact the coronavirus pandemic may have on this rollout, but the company has noted that foot traffic has actually increased in certain types of locations such as grocery stores and convenience stores (a new category of location that the company will be targeting) so the economic headwinds for CBDMEDIC may not be as severe as in other parts of the economy.
With regards to the ingestible line, the company plans a limited launch in Q320 (a slight delay from the previous Q220 expectation) with an initial focus on online sales with limited retail location penetration. A full launch will depend on FDA clarification on its view of CBD in food and supplements (which may include dose limitations) as many retailers will likely want to wait until the guidance is released prior to placing CBD-containing supplements on shelves. The exact timing of guidance is unknown.
Despite strong sales growth in 2019, Abacus reported an operating loss of US$17.4m, due in part to increased marketing and advertising costs (US$12m, up from US$1.2m in 2018).
Acquisition by Charlotte’s Web
Charlotte’s Web entered into a definitive agreement to acquire Abacus in a share deal whereby Abacus shareholders will receive 0.85 of a common share of Charlotte's Web for each Abacus share held. At current market pricing, this translates into an effective purchase price of C$5.58 per share. As stated on its conference call in March, Charlotte’s Web views this acquisition as a game-changer for the company as it would greatly increase its portfolio of topical products from two to 50. Combined, the companies will be in 15,000 unique retail locations (not counting the 16,500 health-related practitioner offices where CBD CLINIC products are sold) and have a current market share of approximately 35% of the food/drug/mass retail (F/D/M) channel (around 17% ahead of the nearest competitor), in addition to an advantaged cost position through a vertically integrated supply chain.
The transaction is expected to close in Q2, if passed following an Abacus shareholder vote at a special meeting (currently scheduled for 4 June 2020) and regulatory approvals. Abacus is confident that the shareholders will approve the transaction in the special meeting vote as the share deal allows for continued equity participation in the CBD market but with a more attractive risk profile in turbulent times due to the greater size and strength of the combined company.
Valuation
Given the pending acquisition by Charlotte’s Web, we are suspending our valuation for Abacus. As part of the transaction, Abacus shareholders will receive 0.85 of a common share of Charlotte’s Web for each Abacus share held (C$5.58 per share based on current share prices) indicating a 14.9% discount at current trading levels.
Financials
We have decreased our sales estimates for 2020 to US$29.2m from US$39.7m as we have significantly reduced our CBD CLINIC sales expectations due to coronavirus. We have also decreased our SG&A estimates for 2020 to US$23.8m from US$30.6m as the company indicated that it will be more conservative on spending due to the coronavirus. Our 2020 operating loss estimate is now US$5.9m, compared to a US$6.3m loss previously. This reduction is mainly due to lower SG&A estimates though this was offset by lower sales estimates. We are also introducing 2021 estimates, which include US$78.3m in sales, assuming a recovery in CBD CLINIC sales, continued expansion of the CBDMEDIC footprint and ingestible sales. We expect 2021 to be profitable with US$22.8m in operating profits.
The company reported US$22.2m in net cash on its balance sheet at the end of 2019. We believe the current cash level will be enough to fund operations through sustainable profitability, although this cushion is likely to be unnecessary due to the anticipated Charlotte’s Web acquisition.
Exhibit 1: Financial summary
US$'000s |
2018 |
2019 |
2020e |
2021e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
8,537 |
15,523 |
29,166 |
78,260 |
Cost of Sales |
(3,484) |
(7,056) |
(10,208) |
(23,478) |
||
Gross Profit |
5,053 |
8,468 |
18,958 |
54,782 |
||
Research and development |
(119) |
(580) |
(812) |
(821) |
||
Selling, general & administrative |
(3,958) |
(25,074) |
(23,820) |
(30,966) |
||
EBITDA |
|
|
965 |
(17,649) |
(6,137) |
22,532 |
Operating Profit (before amort. and except.) |
|
|
970 |
(17,418) |
(5,906) |
22,764 |
Intangible Amortisation |
0 |
0 |
0 |
0 |
||
Exceptionals/Other |
0 |
174 |
0 |
0 |
||
Operating Profit |
970 |
(17,243) |
(5,906) |
22,764 |
||
Net Interest |
(410) |
(289) |
(611) |
(617) |
||
Other (change in fair value of warrants) |
(1,020) |
(3,470) |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
561 |
(17,706) |
(6,517) |
22,147 |
Profit Before Tax (IFRS) |
|
|
(459) |
(21,003) |
(6,517) |
22,147 |
Tax |
0 |
0 |
0 |
(4,651) |
||
Deferred tax |
81 |
4,356 |
0 |
0 |
||
Profit After Tax (norm) |
561 |
(17,706) |
(6,517) |
17,496 |
||
Profit After Tax (IFRS) |
(378) |
(16,647) |
(6,517) |
17,496 |
||
Average Number of Shares Outstanding (m) |
13.0 |
19.6 |
22.5 |
23.4 |
||
EPS - normalised (c) |
|
|
0.04 |
(0.90) |
(0.29) |
0.75 |
EPS - IFRS ($) |
|
|
(0.03) |
(0.85) |
(0.29) |
0.75 |
Dividend per share (c) |
0.0 |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
N/A |
N/A |
N/A |
N/A |
||
EBITDA Margin (%) |
N/A |
N/A |
N/A |
N/A |
||
Operating Margin (before GW and except.) (%) |
N/A |
N/A |
N/A |
N/A |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
158 |
7,720 |
8,139 |
8,624 |
Intangible Assets |
0 |
0 |
0 |
0 |
||
Tangible Assets |
57 |
417 |
836 |
1,321 |
||
Other |
102 |
7,303 |
7,303 |
7,303 |
||
Current Assets |
|
|
6,504 |
29,443 |
23,265 |
41,119 |
Stocks |
1,004 |
1,498 |
3,540 |
3,540 |
||
Debtors |
913 |
3,693 |
3,693 |
3,693 |
||
Cash |
3,814 |
22,192 |
13,971 |
31,825 |
||
Other |
773 |
2,061 |
2,061 |
2,061 |
||
Current Liabilities |
|
|
(4,600) |
(4,371) |
(4,371) |
(4,371) |
Creditors |
(4,600) |
(4,371) |
(4,371) |
(4,371) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(2,198) |
(247) |
(247) |
(247) |
Long term borrowings |
(2,198) |
0 |
0 |
0 |
||
Other long term liabilities |
0 |
(247) |
(247) |
(247) |
||
Net Assets |
|
|
(135) |
32,546 |
26,786 |
45,125 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
829 |
(20,315) |
(6,198) |
19,942 |
Net Interest |
0 |
0 |
0 |
0 |
||
Tax |
0 |
0 |
0 |
0 |
||
Capex |
(63) |
(434) |
(651) |
(716) |
||
Acquisitions/disposals |
0 |
0 |
(1,372) |
(1,372) |
||
Financing |
(170) |
39,550 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Other |
(22) |
22 |
0 |
0 |
||
Net Cash Flow |
575 |
18,823 |
(8,220) |
17,854 |
||
Opening net debt/(cash) |
|
|
(345) |
(1,367) |
(22,191) |
(13,971) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Exchange rate movements |
0 |
0 |
0 |
0 |
||
Other |
448 |
2,001 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(1,367) |
(22,191) |
(13,971) |
(31,825) |
Source: company reports, Edison Investment Research
|
|
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