Although the Canadian cannabis sector has been under considerable pressure, companies that are levered to this market have been reporting strong growth and this is a trend that we continue to closely follow.
Over the next year, we expect to see a divergence when it comes to Canadian cannabis producers. During this time, we expect to see a few companies prove themselves to be leading operators while others continue to flounder and be under pressure. Today, we have highlighted 3 Canadian cannabis producers that we have been following and will be keeping an eye on how these stories continue to evolve.
Aphria: Focused on Becoming the World’s Largest Cannabis Producer
Earlier this week, Aphria Inc. (APHA.TO) (APHA) bounced higher after reporting to have received a cultivation license from Health Canada for Aphria Diamond. This was a significant development that will result in an additional 1,300,000 square feet of production space with an annual growing capacity of 140,000kg. Aphria now has more than 2,400,000 square feet of cultivation space capable of reaching a total annualized production capacity of 255,000kg.
Aphria Diamond is a 51%-owned subsidiary of Aphria Inc., through which the company has partnered with Double Diamond, a company with multi-generational expertise in the commercial greenhouse industry. Aphria Diamond is situated on a 100-acre campus and the property offers significant room to expand. Aphria Diamond features the industrial-scale automation technology that is the hallmark of Aphria One’s Part IV and V expansions. The in-house designed automation will handle cultivation functions including transplanting cuttings, transporting plants through harvesting, de-budding and trimming, drying and curing, and waste disposal.
Aphria is one of the largest cannabis producers in the world and last month, the company reported more than $120 million of quarterly revenue. Going forward, Aphria expects to record strong growth as it continues to capitalize on the opportunity in Canada as well as abroad. The company has significant leverage to the cannabis market in the European Union (EU) and this is a market that we are excited about.
During the last few weeks, Aphria has come under pressure and gave up a good portion of its gains following the quarterly earnings report. We have been following the recent decline and will be monitoring the trend from here.
Aurora Cannabis: Focused on the Entire Cannabis Value Chain
Aurora Cannabis (ACB.TO) (ACB) is a leading Canadian cannabis producer and we have been following the company since 2015. During the last year, Aurora has come well off its highs and we believe that the market is concerned about the current cash position. The company has tried to strengthen its balance sheet by divesting of assets and investments, and this is a trend that has not been well received by the street.
When looking at Aurora Cannabis, we see a business that has significant potential catalysts for growth. In the near future, the company expects to start selling cannabis infused products and is highly levered to the smokeless product market. Cannabis 2.0 in Canada is expected to be a major catalyst for Aurora, and we will monitor how the management team is able to capitalize on this.
Aurora is levered to all aspects of the cannabis value chain and has made significant investments in Canadian cannabis retailers. Over the next year, we expect these investments to starting proving to be significant opportunities for the company and this is something that we will be watching.
During the last quarter, several leading Canadian broker-dealers have lowered their respective price target on Aurora Cannabis. These downgrades have been related to capital concerns and have been in-line with other downgrades in the sector. We believe that Aurora is reaching an inflection point and this is an opportunity that we continue to monitor.
Aleafia Health: A Growth Story to be Watching
Aleafia Health (ALEF.TO) (ALEAF) is a Canadian cannabis producer that we have been closely following and believe that this opportunity is flying under the radar. When compared to its peers, Aleafia Health is trading at a considerable discount and we are bullish on the growth prospects associated with this opportunity.
During the last year, Aleafia Health has been nothing short of an execution story and has been recording growth on all levels. The company is well capitalized, has visible catalysts for growth, and has an attractive risk-reward profile. Aleafia Health is levered to some of the most exciting verticals of the cannabis industry and we find this to be significant.
From burgeoning international markets to cannabis concentrates, there are a number of reasons for us being excited about Aleafia Health. The company represents a multi-faceted growth opportunity that is in the middle of a major expansion and we are of the opinion the market discounts the growth opportunities associated with the operation. We believe there are a number of reasons to be excited about Aleafia Health and we want to highlight some of the potential catalysts for growth:
- Outdoor Cultivation: We believe that the market does not associate much value with this part of the operation nor find this to be significant. Through the outdoor operation, the company will be able to produce low-cost high-quality cannabis and we are favorable on the economics associated with the operation
- International Markets: Earlier this year, the company started selling product to the Australian market and this represented a major milestone for the business. Going forward, we expect to see the company generate more revenue from international markets and to see increasing sales to Australia and Europe
- Cannabis Derivative Products: Aleafia Health has been highly focused on the cannabis oil opportunity and this is a market that is just getting started in Canada. Through the outdoor operation, the company will be able to fuel this side of the business and create high-margin cannabis derivative products to sell to the recreational and medical market
- Strong Balance Sheet: Currently, one of the biggest concerns in the market is related to the strength of balance sheets. Aleafia Health is well capitalized and well positioned to execute on major growth initiatives. With approx. $50 million cash on the balance sheet, the company is well positioned heading into 2020 and this is something to be aware of.
We expect the outdoor cannabis cultivation opportunity to prove to be a major catalyst for Aleafia Health and expect this aspect of the business to fuel the cannabis concentrate side of the business. Aleafia Health is highly levered to the smokeless product market and expect this to prove to be a major growth driver for the business.
When looking at the price targets issued to Aleafia Health from leading broker-dealers, you will notice that the company is trading at a substantial discount and we find this to be significant. Earlier this year, Eight Capital issued the company a $3 price target and we are favorable on this coverage. Over the next year, we expect to see Aleafia Health record strong growth, and this is an opportunity to be watching.
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