The last few months have been difficult for the cannabis sector and the whole industry has come under pressure. The vaping health crisis has put additional pressure on the cannabis industry, and we believe that the recent weakness is overdone. The reported health issues are associated with black market products and we have been closely following this story.
During the last year, the cannabis sector has recorded massive growth, and this is a trend that is expected to become more significant on a going forward basis. Companies levered to the cannabis industry have been reporting impressive revenue growth and we are bullish on the growth prospects associated with what has become a global opportunity.
Although most of the market is focused on the cannabis market in North America (Canada and the US), we are impressed with the way the global market has evolved. From Australia to Europe, and from South America to Africa, legal cannabis markets are opening all over the world and this is a trend that cannot be ignored.
Today, we have published a report that highlights 5 companies that are well positioned to capitalize on the global cannabis market. We believe that investors need to be focused on businesses that have growth prospects outside of North America and have found that these opportunities are worth taking a look at. In the report, we have also taken a deep dive into the businesses, especially as it relates to a capital raising standpoint. We believe that this provides important context as it relates to the strength of the balance sheet and the steep discount that these businesses are trading at.
Aleafia Health: A Fully Funded Global Growth Story
Aleafia Health Inc. (ALEF.TO) (ALEAF) is a leading Canadian cannabis producer and one of the most underrated opportunities. The company is trading at a considerable discount to the price of its last financing, has more than $50 million of cash on the balance sheet, and has been issued price targets from leading broker-dealers that imply that there is a significant premium to current levels.
During the last year, Aleafia Health has been nothing short of an execution story and has been able to advance the operation in a number of ways. We believe that the market significantly underappreciates the growth aspects associated with the Canadian cannabis producer as it relates to the international opportunity and believe that its acquisition of Emblem (completed in March) will play a key role in the success of this side of the business.
Last week, Aleafia Health reported to have completed the construction of its Paris Processing facility’s Phase II expansion and secured full site occupancy in early October. The Paris Phase II expansion is a 30,000 sq. ft. facility entirely dedicated to the extraction, production, packaging and distribution of high-margin, value-added cannabis health and wellness products. We are bullish on the growth prospects associated with this market due to the massive consumer demand for these products and expect this vertical to be a major revenue generator in 2020 and beyond.
Aleafia Health is in the final stretch of a major expansion and has fully funded this initiative. This is an important aspect of the story since many companies do not have the capital that is required to execute. The expansion builds upon the current, licensed and operational Paris facility which features cultivation rooms and handles all extraction, packaging and order fulfillment for Aleafia Health’s medical, adult-use and international sales.
The Paris facility will feature an initial 115,000 kg dried flower equivalent (DFE) extraction capacity, a 2,775% increase over the company’s current 4,000 kg DFE extraction capacity. The company expects that Paris can through-put all dried flower grown by Aleafia Health and we are bullish on the growth prospects associated with the facility as it relates to the international opportunity.
The facility is purpose-built to meet EU-GMP certification requirements which demonstrates the highest level of pharmaceutical-grade quality. The certification will allow Aleafia Health to begin exporting finished goods including cannabis oils and capsules to the EU and this represents a considerable growth opportunity. Through the Aleafia Health Germany joint venture with German pharmaceutical wholesaler and logistics company Acnos Pharma GmbH, Aleafia will gain access to the burgeoning German medical cannabis market with 22,000 pharmacies and 110 distribution centers.
We believe that the EU market represents the next frontier for growth for the cannabis industry and we expect this market to be a major growth driver for Aleafia Health. The Paris expansion will rapidly accelerate the company’s production capacity, and its ability to create a wide variety of differentiated products across multiple categories.
One of the reasons we are excited about the facility is due to the way it has been built to allow for further significant expansions of extraction capacity by utilizing additional machinery. For instance, the existing capital expenditures budget accounts for additional ethanol extraction machinery that would bring total capacity to 190,000 kg DFE and would take approximately eight weeks to bring online. This represents a significant opportunity for the company to increase capacity in a manner that is efficient from an amount of capital and time standpoint.
When it comes to safety, the facility meets the most stringent standards and this is a very important part of the process. The health issues associated with vaping have made safety of the utmost importance and we are favorable on the way Aleafia Health has positioned itself in regard to this. Each element of the extraction and production process occupies a purpose-built, dedicated room in the facility, maximizing through-put ability and operational efficiency. Highlights include:
- 40,000 kg DFE of supercritical C02 extraction which is primarily used for the production of pharmaceutical-grade oil-based products including capsules and sprays
- 75,000 kg DFE of ethanol extraction, which produces a tasteless distillate ideally suited for new product formats including edibles, beverages and extracts
- In-house analytical testing and quality assurance equipment, allowing for products to reach market two to three weeks earlier than with the use of external third-party testing
- Production and packaging machinery along with space dedicated to creating new, differentiated product formats soon available in the Canadian market
- A dedicated laboratory for ongoing R&D, product development and continued process optimization
- A logistics center handling order fulfilment to medical patients, provincial wholesalers and all international exports
- The entire expansion project, including machinery for yet to be announced new product formats, falls within the company’s fully funded, previously reported capital expenditures budget
The Paris expansion represents the crown jewel of Aleafia Health’s cannabis ecosystem and we are favorable on this aspect of the story. This facility will allow the company to rapidly expand the production of high-margin derivative products, while adding new, differentiated formats that are grown, processed, packaged and exported by Aleafia Health. Over the next year, we expect to see the company expand into additional emerging international markets and believe that the market underappreciates this aspect of the story.
Aphria’s International Business Generates $100+ Million of Revenue
Yesterday, Aphria Inc. (APHA.TO) (APHA) released fourth-quarter financial results and reported better-than-expected revenue numbers, generating approx. $126 million (CAD) during the period with $16.5 million of net income. When compared to the same period last year, total revenue increased by approx. 850% and this represents massive growth. Aphria reported a second consecutive quarter of profitable growth with strong contribution from its Canadian cannabis operations. The success during the quarter was driven by the international side of the business and the strength and growth of its brands.
Aphria was one of the first Canadian LPs and the company benefited from having a first mover advantage when it came to the international side of the business. Similar to Aurora Cannabis and Canopy Growth, Aphria was highly focused on the EU opportunity and started to acquire strategic assets that could play a key role in how the company would be able to penetrate this market.
One of the most significant acquisitions reported by Aphria was that of CC Pharma, a leading distributor of pharmaceutical products to more than 13,000 pharmacies in Germany that generates more than €200 million of revenue per year. Prior to acquiring the leading importer and distributor of EU-pharmaceuticals, Aphria announced a supply agreement with CC Pharma to export approx. 1,200 kilograms of medical cannabis products from Canada to Germany.
Following the closing of the acquisition, Aphria created a new division of CC Pharma that would be dedicated to medical cannabis and we are favorable on the amount of value that has already been created through this asset. If you analyze the performance of the Canadian cannabis producer during the fourth quarter, you will see the impact that CC Pharma has had on the business particularly given that management expects this trend to become even more significant in 2020.
Of the $126 million of revenue that was generated during the fourth quarter, more than $99 million of it was generated from CC Pharma’s distribution activities. During the period, Aphria generated $33.5 million of revenue from the sale of cannabis (over 3,228 kilogram equivalents sold on the recreational market and 1,417 kilogram equivalents sold on the medical market).
Over the next few weeks, we expect to see several leading Canadian LPs report quarterly financial results and will be watching how these companies grow on a quarter-over-quarter basis. When looking at the Canadian recreational cannabis market, there is a lot to be excited about as new products are approved to be sold to consumers. We expect this to be a catalyst for future quarters and are bullish on the growth prospects associated with this trend.
Aurora Cannabis: Raises Capital to Fund International Growth
Aurora Cannabis (ACB.TO) (ACB) represents one of the most advanced operators when it comes to the international cannabis opportunity. Over the last few years, the company has made several acquisitions of Canadian and international cannabis producers and we have been closely following this aspect of the business.
A few weeks ago, Aurora Cannabis published an operational update that discussed the state of its operations. This comprehensive update provided a deep dive into the business and are favorable on the growth prospects associated with the operation. The market did not respond as favorably as anticipated and we will monitor how the management team continues to advance the operation.
We have been following Aurora Cannabis since inception and have been keeping an eye on how the story has evolved over the years. From financial to acquisitions, we have been on top of the story and are impressed with the continued execution. When you are looking at the recent quarterly financial results reported by Aurora Cannabis, you will notice that a majority of the revenue has been derived from its Canadian operations. Currently, the company has cannabis assets in more than 20 countries, and we expect to see the international side of the business have a larger impact in 2020 and beyond.
Although the growth prospects associated with Aurora Cannabis are massive, the amount of cash that is needed to execute is even more significant. The Canadian cannabis producer has spent hundreds of millions of dollars construction massive cultivation facilities in Canada and these projects have taken longer than expected to come on-line.
Over the next year, we expect to see the company announce additional financings or divestures to fund its international growth initiatives. So far, the market has not been too happy when it comes to the company selling off assets, but we believe that it is necessary in order for the company to execute.
If you pull up a chart of Aurora Cannabis’ stock chart for 2019, the year seems to have been a roller coaster year for the company. The recent decline has been significant, and momentum has been trending lower during this time. We believe that Aurora Cannabis has considerable growth prospects, and this is an opportunity to keep on your radar.
Canopy Growth: A Global Cannabis Leader?
You cannot talk about Aurora Cannabis and the international cannabis opportunity without mentioning Canopy Growth Corporation (WEED.TO) (CGC), which was once a darling of the cannabis industry.
Canopy Growth was a first mover when it comes to the international cannabis opportunity and it has been scooping up assets all over the world for the last few years. Unlike Aurora Cannabis, Canopy Growth is backed by big money and received a $4 billion investment from Constellation Brands in 2018.
Although Canopy Growth has one of the strongest balance sheets in the cannabis industry, the assets that it has acquired post-financing have been questionable. A few months ago, Constellation Brands had Bruce Linton fired as the CEO and Chairman of Canopy Growth and we were surprised by this decision. During the last few years, Bruce had been one of the most influential figures in the cannabis industry and the market did not respond favorably to this decision.
When it comes to the amount of revenue that Canopy Growth is generating from cannabis markets outside Canada, the numbers are not eye popping and this is a trend that we expect to change over the next year. Markets across Europe are just starting to open up to cannabis and we expect to see increasing demand on a year-over-year basis.
2019 has been a rough year for Canopy Growth and the shares are trading near its 52-week low. Momentum has been trending near or at oversold levels for several months and this is a metric that we continue to closely follow. The recent performance has been impacted by a series of downgrades issued by leading Canadian broker-dealers and we will keep an eye on how the story continues to advance.
CannTrust: More like Cant-Trust (Yet)
CannTrust (TRST.TO) (CTST) is the epitome of what can go wrong in the cannabis industry when a business is led by a management team that is greedy and does not act in the best interests of shareholders.
Earlier this year, the Canadian LP was considered to be a darling of the cannabis industry and was valued at more than $1 billion. Fast forward a few months and the company is in shambles, having watched its market cap lose more than 80% of its value. From the firing of the management team (which was completely aware of the illegal activities taking place at the company) to the losing of supply contracts, CannTrust has been in a world of hurt and this has put pressure on the rest of the cannabis industry.
Going forward, the future is very uncertain for CannTrust and we continue to cautiously monitor how the story evolves from here. Shortly after the company came under fire, the Board of Directors hired a financial adviser to assist it with a strategic review of its options, including a possible a sale of the company. So far, there have not been any bidders for the distressed Canadian LP and we are not surprised by this.
On Tuesday, the company announced that it will destroy C$12M of plants and C$65M of inventory as it makes strides to get back in good standing with Health Canada. The stock is up over 40% in the last two trading sessions and has come well off its lows. We will be monitoring the situation closely as we still see massive headwinds in front of the stock. There are several lawsuits incoming and much uncertainty as it relates to the timelines of Canntrust operations being able to come back online.
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