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Kanabo shares have halved since the IPO surge. Is it a bargain buy?

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I first wrote about Kanabo (LSE:KNB) shares in late February, just after the IPO. The IPO was actually a reverse takeover of Spinnaker Opportunities. At that point, the shares were surging higher from the issue price, and were trading around 31p. My conclusion in this case was to wait until the extreme volatility had died down to a more stable price. At that point, it would be worth reviewing again. 

It has now been seven weeks since that point in time, and Kanabo shares have certainly provided much action since then. So has the dust settled to consider buying?

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Kanabo shares settling down

The shares rocketed up above 50p as part of the initial rally back in February. Since then, we’ve seen a correction and consolidation around the 25p mark, about half the level seen since the peak of the IPO aftermath.

From this level, I think it’s now calmed down (slightly) from the choppiness seen in the first couple of weeks. My patience has been justified, and so I can now look at the current valuation and see if it makes sense.

With Kanabo shares around 25p, this gives it a market capitalisation around £88m. It’s hard for me to accurately assess this value, as the company hasn’t released any major results since going public. But from what I can see in the 2021 prospectus, the business was loss-making in 2019.

This makes it hard for me to see Kanabo shares as a bargain, as I still don’t have up-to-date figures to judge it on. Outside of company figures, I can look at the size of the market it operates in. Kanabo develops and sells a range of THC-free retail CBD products. In short, it’s focusing on the booming cannabis-linked market. 

What could the market size become?

Since medicinal cannabis was legalised in the UK in 2018, the market has been growing rapidly. In a report released last year, it was forecast that the UK legal cannabis market would reach £2.31bn by 2024. Considering the fair market value was £0 in 2018 before legalisation, this is quite a rapid growth trajectory!

For Kanabo, being one of the first movers in this space to get listed and to put a marker in the ground is an advantage to gaining share. I think this should allow it to garner a good proportion of this market share. After all, it has the funding (money raised through the listing) to exploit the opportunities. 

I can’t put a fair value on this right now, but if Kanabo manages to have just 1% of the market share by 2024, this figure would be over double the current market capitalisation of the company.

From that angle, yes I do think that it looks like a bargain buy for the future. The risk here is that either Kanabo fails to get to 2024 due to poor business management strategy. Or the other risk is that the market size doesn’t reach the estimate given. In that case, my argument doesn’t carry much weight. 

Only time will tell for Kanabo shares, but I’m happy to take that risk and so would look to buy right now for the long term.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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