The big news of the week and probably the month on the NZX was the IPO of Cannasouth. In a vibrant IPO market, this would not normally make too much news but it has made headlines for two reasons:
- It is the first IPO in New Zealand for the last 2 years.
- It is a medicinal Marijuana company.
I will not pretend to give you too much of an insight into what Cannasouth does. I haven’t taken the time to do read the prospectus or do any real research on them. Warren Buffett famously says that you should have your circle of competence and understanding and stay well within that. It is fair to say that medicinal marijuana companies fall well outside that circle for me, so I just don’t really give it the time of day. So, you should take what I say with a grain of salt.
I am bearish on investment in Marijuana related stocks in general, by this I mean that as a basket or a group I think they will be poor investments with the odd bright star. However, I am bullish on the future legalisation of Marijuana related products, by this I mean that I think it will eventually happen.
So since I do not have any opinion on the company itself, what did the media and analyst community say:
Brian Gaynor, a famous NZX commentator, in his article in the Herald said, “Cannasouth’s share structure is reminiscent of the bad, old mid-1980s. In other words, I believe the Cannasouth IPO has a structure that primarily benefits existing shareholders rather than those participating in the IPO”.
Shareclarity said; “Cannasouth is a very early-stage investment that is being priced 70-200% higher than later-stage IPOs and 25-100% higher than other established medicinal cannabis companies on the Australian Stock Exchange. Cannasouth is a startup cannabis research and development company that generates no revenues, owns no substantive assets, has no products in market or in development, has no commercial agreements apart from some non-exclusive licenses to import cannabis seeds and plants, and it cannot start to sell products in New Zealand without Government reforms that are far from certain”
Hamesh Sharma, from Australasian Trading Management (a company I have a small shareholding in said), sums it up quite well from a price action perspective; “Clearly this is an extremely high-risk investment which has been priced at an eye-watering valuation – in saying that, with retail investor appetite for the sector the price reaction post IPO could go either way. Watch this space”.
As I said, I won’t be personally quoted on what I think of the company. But we can look at the basic numbers. By all accounts, the company is still at the research phase and makes no revenues or profits. So a company that is making no revenue or profits is going to have some costs. Just as a base case there will be leasing, staffing and research costs. So they are going to be losing money. I am not sure how long it will take them to generate revenues, that is if they do get to the revenue stage at all, but judging from the Shareclarity quote it might be a while if they have to get around the government.
There looks like there are 102 million shares outstanding with a share price of around 40 cents per share. So that is close enough to a $40 million valuation. So the question is, would you pay $40 million for this company? That is what you have to ask yourself. Of course, you are not paying $40 million but it is always worth thinking about things in terms of buying the whole company, as your shareholding is just that a share of $40 million. Now do not get me wrong, this could be a very successful investment, the company could hit gold, they could come up with a medicinal product that cures cancer and they will generate significant revenues and profits. And if you could figure this out and invest on this basis then you will make a significant profit. So that is one outcome. But one thing I can tell you is that if you made an investing career out of investing in speculative research companies at valuations of $40 million that have no revenues or profits then on average, you will lose over the long term.
But this is not the only way to make money on the stock. Like Hamesh said, the price reaction could go either way. So even if you didn’t know what was going to happen with the underlying business you could speculate as to what was going to happen with the stock. And basically, what you are saying here is, I hope that someone else is going to buy it off me for more later, that is what you are relying on. And that could happen. Certainly could, especially in a sexy sector like marijuana. Also, it could be that someone comes out and buys the whole company. That would also generate you a profit.