Canaccord Genuity (TSX:CF, LSE:CF) slashed its price target on Canopy Growth Corp following news of the cannabis company’s plan to convert nearly C$253 million of unsecured convertible notes into equity – a move analysts decried as dilutive.
The investment bank downgraded its target to C$3.50 from C$4.50 and reiterated its ‘Sell’ rating on the stock.
Analysts noted that Canopy’s management does not anticipate inflecting into adjusted EBITDA breakeven territory until FY2024, due to continued industry headwinds and lower revenues.
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“We believe the risk of continued pressure on equity valuation remains elevated as the company utilizes its cash coffers to fund sizable operating losses, or as evidenced above, the potential for sizable dilution in order to reduce its overall debt load as part of its turnaround initiatives,” the analysts wrote.
The Canadian cannabis company recently announced it had entered into a string of agreements with a group of its debt holders – including strategic partner Constellation Brands (NYSE:STZ) – to convert $253 million of its nearly C$600 million 4.25% unsecured senior notes into equity.
This would result in Canopy issuing another 56 million or so shares, with the potential to issue around 78 million shares, Canaccord noted, and an increase of between 14% to 20% to its basic share count at the end of 2022.
“As we believe pressure on WEED's valuation will persist, using the high end of the potential dilutive impact of the above conversion, we have added 78 million shares into our pro forma capital structure for the company, while removing approximately C$253 million of convertible debt,” analysts wrote.
“(As) a net result of the above capital structure changes, we are reducing our price target to C$3.50 (from C$4.50), and reiterating our Sell rating.”
Shares of Canopy Growth closed at C$3.63 in Toronto on Monday.
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