During the last year, we have seen a significant increase in the level 1of consolidation in the Canadian cannabis industry, Canadian Licensed Producers (LPs). We have been closely following this trend and have been monitoring how these transactions have benefited the companies as well as the shareholders.
When analyzing a merger or acquisition, there are a number of factors to look into:
1) the amount of synergies between the businesses, 2) the purchase price and terms of the transaction, 3) the growth prospects of the combined company, and 4) the corporate culture of each organization to assess compatibility.
Some of the primary drivers of the increased consolidation among Canadian LPs include the amount of production capacity (completed or under construction), the leverage to emerging international markets, the capital structure, and the focus on developing of derivative cannabis products. We have conducted significant due diligence on the recent mergers and acquisitions in the cannabis space and have highlighted an opportunity that has been flying under the radar.
The company, Aleafia Health Inc. (ALEF.TO) (ALEAF) is in the early innings of a major growth cycle and recently completed the acquisition of Emblem, a leading Canadian LP. Although this acquisition was transformational for Aleafia Health following the closing of the transaction the market has been negative on the opportunity. We believe that this company is worth watching.
Aleafia Health is Flying Under the Radar
When it comes to Aleafia Health, there are a number of factors that have us excited. First, we expect the company to recognize massive synergies from its acquisition of Emblem and believe that it was immediately accretive to the overall business. Second, the combined company has significant leverage to the Canadian cannabis market (medical and recreational) and has an attractive portfolio of smokeless cannabis products. Third, Aleafia Health represents a differentiated opportunity and we are favorable on its potential catalysts for growth. Finally, although the recent decline has been significant the valuation is very attractive on a comparative basis.
In late April, Aleafia Health announced a significant development outdoor grow expansion to a plant-ready state with all of the required security measures (i.e. fencing and cameras) in place. Following this development, the company plans to submit its final evidence package to Health Canada and we are favorable on the amount of value that is associated with this initiative.
Subject to the receipt of approval from Health Canada, Aleafia Health expects its outdoor grow to produce approx. 60,000 kg of dried cannabis flower per year. The Canadian cannabis producer expects to produce cannabis at a cost per gram that is significantly lower than what is produced at a traditional greenhouse or indoor cultivation facility.
Once Aleafia Health has completed the expansion of its three cultivations facilities, the company expects to reach an annual production capacity of 138,000 kg of dried flower and an extraction capacity of 50,000 kg. This amount of capacity includes the supply agreements that Aleafia Health has with Tilray and Aphria. With this amount of production capacity, the company will be generating significant revenues and represents a significant opportunity.
Aleafia Health is Recording Strong Revenue Growth
Last week, Aleafia Health reported a major development having completed the largest recreational cannabis order in the company’s history. The order will contain Aleafia Health’s branded Symbl products and is valued at more than $700,000. This is a significant order for the company and builds upon the success that it has already had during the second quarter.
The Canadian recreational cannabis market is proving to be a significant opportunity for Aleafia Health and during the first 38 days of the second quarter, the company has generated more than $1.2 million in revenue from three provincial governments. This number includes the $700,000 order and we are impressed with the recent developments.
Over the next year, we expect to see Aleafia Health record massive revenue growth and the recent developments support this opinion. The company expects to benefit from Health Canada’s changes to cannabis licensing that will alleviate product shortages and application backlogs. Aleafia Health has significant growth prospects and we will monitor how the team continues to execute.
A Differentiated Opportunity to be Watching
Last week, Aleafia Health reported financial results for the period that ended on December 31st and recorded strong growth on a comparative basis. The company is well positioned to execute on its previously announced initiatives and we are favorable on the management team’s ability to create value for shareholders. Going forward, we expect to see Aleafia Health’s revenues ramp higher as it starts to recognize the significant value associated with its recent acquisitions. We expect the market to respond favorably to this development.
One of the reasons we are excited about Aleafia Health is due to the number of avenues that it has for growth. Last month, the company launched FoliEdge Academy, a first-of-its-kind cloud-based cannabis education and certification platform that features proprietary, interactive courses that have been customized for large organizations, unions, insurance and healthcare providers, as well as educational institutions.
Over the next few years, we expect to see a significant increase in the need for education and training services for the cannabis industry. FoliEdge Academy course content will represent an important part of Aleafia Health’s scalable, cannabis health and wellness ecosystem, and can integrate with the company’s medical cannabis clinic network that has seen more than 60,000 patients to date. The introduction of this platform cements Aleafia Health’s horizontal diversification strategy and we are favorable on the growth prospects associated with this.
The combination of Aleafia Health and Emblem is also significant given the amount of value that can be created between Canabo Medical Clinics and GrowWise Health, which are subsidiaries of the respective companies. These subsidiaries are highly focused on the cannabis clinic opportunity. We are favorable on the growth prospects of the combined company.
With regard to the FoliEdge Academy platform, the combined company is better positioned to execute on this opportunity. Through GrowWise Health, the company has focused on improving patient education and this division should support the success of this new venture.
An Opportunity with Significant Growth Prospects
Although the market seems to underappreciate the potential of the combined company, this opportunity presents significant catalysts for growth. Now that the acquisition is complete, the Canadian cannabis producer plans to capitalize on high-growth opportunities in Canada and abroad across four verticals: Cannabis Production, Health and Wellness, Cannabis Education and the Consumer Experience.
Going forward, Aleafia Health will be able to leverage Emblem’s extraction and product innovation to sell high-margin medical cannabis directly to its patient base for the first time. This represents a significant opportunity for the combined company as well as its patient base which will be able to access Emblem’s differentiated high-margin derivative cannabis products.
Aleafia Health will also benefit from this acquisition through the Provincial supply agreements that Emblem has secured in Ontario, Saskatchewan, British Columbia and Alberta. The leverage to these markets is significant and the company plans to gain national medical distribution through Emblem’s agreement with Shoppers Drug Mart and gain national retail distribution through Fire & Flower, Starbuds and the emerging OnePlant network.
We believe that the combined company has very attractive growth prospects and should benefit fromsignificant synergies in the coming quarters. We are of the opinion that the market underestimates Aleafia Health’s potential catalysts and believe that this is a company to have on your radar. To learn more about Aleafia Health and how it plans to capitalize on the burgeoning cannabis industry, please reach out to firstname.lastname@example.org.
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