Why the Elixinol Global share price crashed to a record low today

The Elixinol Global Ltd (ASX: EXL) share price is among the biggest losers on the market today after the stock crashed on a dimming outlook and a broker downgrade.

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The Elixinol Global Ltd (ASX: EXL) share price is among the biggest losers on the market today after the stock crashed on a dimming outlook and a broker downgrade.

The EXL share price tumbled 18% during lunch time trade to a record low of 72 cents when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) and All Ordinaries (Index:^AORD) (ASX:XAO) indices added 0.2% in value.

The medicinal cannabis company issued some bad news recently but today’s big sell-off is probably triggered by Bell Potter, which downgraded the stock to “hold (speculative)” from “buy (speculative)”.

Many reasons for the downgrade

What’s more, the broker made a big cut to the stock’s valuation. It lowered its price target to $1.11 from $2.35 per share.

News of a potential class action against the company in the US and its withdrawal from Japan are just some of the headwinds that management disclosed recently. Bell Potter highlights the US Food and Drug Administration (FDA) as another weight around the company’s neck.

The US drug regulator is not convinced that cannabidiol (CBD) products are safe and this finding has big implications for the once-hot sector.

“It is a disappointing outcome given the plethora of scientific data on the safety of CBD. Nevertheless, the FDA’s enquiries are ongoing,” said Bell Potter.

“The FDA acknowledges the multiple studies conducted on safety, however, its concerns relate to the very long-term use of these products, for which there is no adequate scientific data to support a view on safety.”

No near-term turnaround

What this essentially means is that the FDA is unlikely to change its tune until there is longer-term evidence on the efficacy of CBD. This dashes any hope that the FDA might be more favourably predisposed to CBD products.

“Following the FDA announcement on safety, its apparent that industry revenue growth will be delayed compared to our previous expectation, consequently there are changes to the long term DCF [discounted cash flow] model and the valuation,” added Bell Potter.

“We are concerned that the cost base is too high relative to current revenue projections and the current cash burn. This raises the prospect of a capital raise at the current depressed share price.”

Other reasons to be bearish

But a cap raise when such a dark cloud is hanging over the stock isn’t the only reason for shareholders to be spooked.

The broker noted that the escrow period for founding shareholders who control 56% of the company will end on January 8, 2019. This means there may be a fresh wave of selling in 2020 – not a great way to start the new year.

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