Group 3 Nova Cannabis

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University Canada West *

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625

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Finance

Date

Jun 2, 2024

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pptx

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Uploaded by SuperHumanGoose3681

Prof. Warren Goldblum Group 3 Investment Analysis and Management Nova Cannabis Inc.

• Company Assessment based on its Revenue Model and Value Buds • Strategies implication • Industry analysis based on provincial consumption and Market analysis of the Company • Ratio Analysis - P/E, P/B, P/S, EPS • Company Valuation based on DFC Model • WACC (Weighted Average Cost of Capital) • Risk assessment • Key Considerations • Recommendation Executive Summary

Firm Assessment Business model of Nova Cannabis Inc. • Nova Cannabis Inc. is operating business as a national retailer of cannabis and the majorly via its Value Buds Banner. Mission: Deliver compelling value to its customers. Objective: Grow, attract, and retain loyal customers by offering quality cannabis products at lower rates. Revenue Model: Nova generates revenue from the sale of cannabis products in the 92 retail store locations in Saskatchewan, Ontario, and Alberta. They generate 70% of its revenue from the “ Value Buds ” banner. They also have $5544 revenue from proprietary licensing in 2022 and a major $220876 from retail sales. Strategy: They follow the low-cost strategy model to maintain their profitability with growth.

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Revenue and Profit of Nova Cannabis during 2022 & 2021 Quarterly Revenue and Gross Margin growth of Nova Cannabis

Strong Execution and growth record from October 2018 to May 2023 Trey Research

Cannabis retail industry analysis The Canadian cannabis market has witnessed a growth trend in double digits since legalization. Industry facts and figures • In 2022, the annual sales of cannabis for non-medical purposes by provincial cannabis authorities and other retail outlets were $4.5 billion. • An estimated 68% of cannabis users reported obtaining at least some of the cannabis they consumed from a legal source in 2020, higher than before legalization in 2018 (23%) and just after legalization in 2019 (47%). Growing cannabis, either themselves or by someone else, was a supply source for 14% of consumers in 2020, higher than in 2018 (8%) or 2019 (9%). • Overall Market Share as per Q4 2023 is 33.4%

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Ratio Analysis Year 2023 2022 2021 2020 Sales 253,319 226,420 134,364 6,314 No of Shares Outstanding 57,181 57,132 52,348 56,686 Total Equity for Shareholders 50,401 47,816 58,766 17,061 Net Profit 2,178 - 11,205 - 2,064 - 2,073 - EPS 0.04 - 0.23 - 0.04 - 0.12 - MPS 1.28 1.24 2.90 BVPS 0.88 0.84 1.12 0.30 Sales Per Share 4.43 3.96 2.57 0.11 Price to Earnings Ratio 29.62 - 5.29 - 82.57 - - Price to Book Value Ratio 1.45 1.48 2.58 - Price to Sales Ratio 0.29 0.31 1.13 - Sales: Has shown consistent growth over the last four years. Indicates Positive Momentum Earnings Per Share: EPS has been negative over the last four years. Potential improvement in profitability could be observed due to the decreasing magnitude of losses.

Price to Earnings Ratio In 2022, the P/E ratio has improved to -5.29 indicating an improvement in earnings. In 2023 P/E has been – 29.62 and the development trend may indicate a positive development in financial performance. Price-to-Book Value Ratio The P/B ratio has remained relatively stable over the last years. Having a P/B ratio over 1 indicates investor confidence in the company’s assets and future growth. Price to Sales Ratio The decreasing trend which could be seen over the years indicates that stock is undervalued relative to its revenue generation.

Valuation of the company title Data: 2020 to 2023 (Quarterly Method: Discounted Cash Flo

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Discounted Cashflow Calculation

WACC Calculation Cost of Equity Beta -2.00865 Market Return -10% Risk Free Rate 4.30% Cost of Equity 33.02% Cost of Debt Interest Expense 4518 Total Debt 71703 Cost of Debt 6% Income Tax Rate 15% Cost of Debt after Income Tax 5% Total Debt 71,703,000.00 0.41 Market Cap 101,826,000.00 0.59 Total 173,529,000.00 WACC 22%

Risk Assessment • Material Uncertainty Related to Going Concern: Auditor's report highlights doubts about the company's ability to continue operating without liquidation. • Impairment Assessment of Goodwill: Significant goodwill on balance sheet, impairment assessment involves judgment and assumptions. • Dependence on Credit Facility and Debt Restructuring: Operations reliant on credit facility, recent debt restructuring highlights dependency. • Regulatory Risks and Compliance: Subject to stringent regulations, failure to comply could result in fines or inability to operate.

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• Market and Competition Risks: Highly competitive and evolving market, changes could impact market share and profitability. • Operational Risks: Inventory management, supply chain disruptions, and execution of business strategy are operational challenges. • Valuation Risk: Negative Price to Earnings (P/E) ratio suggests market skepticism about future profitability. Negative P/E ratio moving towards a less negative stance indicates slow improvement in market valuation, but persistent negative values suggest continued valuation risk.

Key Findings From Analysis Market availability • 70% of cannabis products consumed in Canada are acquired legally; a ready market exists. • The rate of cannabis use has grown from 5.6% in 1985 to 14.8% in 2017. Company portfolio • 70% of revenue from its revered ‘value buds’. Extra revenue of $220876 from retail sales and $5544 from Proprietary licensing in 2022. • Ratio Analysis indicates consistent and positive momentum in earnings, negative earnings per share, and Improved P/E ratio ( -5.29 in 2022 and -29.62 in 2023) indicating positive financial growth. However, the decreasing price-to- sales. Ratio indicates the undervaluing of the products contrary to their actual revenue value. Risk assessment • Evolving markets and competitive business environments pose risks to the company • Supply chain disruptions and inventory management pose operational risks to the company. • Low P/E ratio and decreased prices-sales ratio indicate valuation risks to the company. The movement of the p/e ratio from negative to less negative shows a slight but gradual improvement in the company’s performance. Overall, the company’s financial analysis provides a positive picture of a resilient business with growth potential. Add a footer 14

Recommendation Yes Yes No No Yes Yes 15 BUY BUY SELL HOLD

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References • Nova Cannabis - Investor Relations . (n.d.). https://novacannabis.ca/home/default.aspx • Guru, E. (2023, December 14). Nova Cannabis (NOVC.T) and Legal Cannabis in Canada, is the worst behind us? Equity.Guru. https://equity.guru/2023/12/14/nova-cannabis-novc-t-and-legal-cannabis-in-canada-is-the- worst-behind-us/ • Nova Announces Third Quarter 2023 Results . (n.d.). https://novacannabis.ca/news/news-details/2023/Nova-Announces-Third-Quarter-2023-Re sults/default.aspx Add a footer 16

Thank You!