Although 2019 was a tough year for the cannabis sectors, we expect market conditions to improve in 2020 and continue to closely monitor how the industry continues to advance.
During the last six months, we have conducted significant due diligence on several North American cannabis companies to better understand the landscape of the cannabis industry and to determine which companies are best positioned to record strong growth in 2020 and beyond.
Over the next week, we will be releasing a series of articles that cover the companies that meet certain criteria as we believe that these businesses represent attractive growth opportunities. The criteria that we are looking for when analyzing these companies include:
- Is reporting strong revenue growth and is executing on a strategy to become a profitable;
- The company is well funded and has enough cash to capitalize on organic and inorganic growth opportunities;
- Is led by a management team that is focused on creating value for shareholders;
- Is trading at a discount when compared to its peers and has an attractive risk-reward profile;
- Is focused on enhancing the overall operation and on capitalizing on high-growth verticals within the cannabis industry.
The first company that we want to highlight in this series is Aleafia Health Inc. (ALEF.TO) (ALEAF). 2019 has been a banner year for the Canadian Licensed Producer (LP) and we expect 2020 to be a period of sustained growth. At current levels, Aleafia Health is trading at a considerable discount to its peers and we are bullish on the growth prospects associated with the operation.
Aleafia Health: An Under-appreciated Global Growth Opportunity
From Canada to Europe, Aleafia Health has been highly focused on increasing its market share in major cannabis markets and we expect this to be a major theme for the company in 2020. Going forward, we will be closely monitoring how the management team is able to execute on its global growth strategy and believe that the market does not fully understand this aspect of the story.
When it comes to the domestic and international cannabis opportunity, Aleafia Health has already benefited from the acquisition of Emblem. From cannabis production to patient education we believe that the combined company has attractive catalysts for growth and is levered to several high-growth verticals of the cannabis industry. The three catalysts that we are most excited about include:
- The cannabis 2.0 opportunity in Canada: Through the acquisition of Emblem, Aleafia Health has been able to expand its product offering and has significant leverage to the cannabis concentrate market. Over the next year, we expect the company to start to capitalize on Canada’s 2.0 market and are bullish on the growth prospects associated with this
- The international cannabis opportunity: Prior to the acquisition of Emblem, Aleafia Health had attractive leverage to the Australian cannabis market. Through Emblem, the company is also levered to the cannabis opportunity in the European Union and we expect this aspect of the story to become more significant in 2020 and beyond
- Increasing production capacity: During the last year, Aleafia Health has been focused on increasing production capacity and we are favorable on the way the management team has been able to execute on this. Next year, we expect to see the company to benefit from the increasing production capacity and this is an attractive aspect of the story
A Multi-Faceted Growth Story to be Watching
One of the most important aspects of the Aleafia Health opportunity is related to the management team. During a time where cannabis companies are running low on cash, Aleafia Health has been able to strengthen its balance sheet as total expenses declined substantially for the second consecutive quarter, despite a significant increase in the scale of the business. We believe that the company is led by a management team that has been able to execute on important growth initiatives while cutting costs and improving operational efficiencies.
When analyzing the quarterly results reported by Aleafia Health in November, one metric that stands out is the growth from a medical cannabis patient standpoint. During the quarter, the company reported a 48% increase in the number of medical cannabis patients, and we are bullish on this trend. Going forward, we expect to see continued growth on the medical side of the business as Aleafia Health and this is a metric that the market should be aware of.
From a production capacity standpoint, Aleafia Health has been nothing short of an execution story and is working to complete a major expansion. Once the expansion is complete and operational, the Canadian cannabis producer expects to reach an annual production capacity of 138,000 kg of dried flower across indoor, greenhouse, outdoor and strategic supply agreements, as well as an extraction capacity of 50,000 kg. We are bullish on the amount of revenue that can be generated through the company’s facilities as well as the distribution that is already in place.
Distribution is one of the most important aspects of cannabis industry and Aleafia Health has been laser focused on this. The company has distribution relationships across four provincial providers (Ontario, Saskatchewan, British Columbia and Alberta), three independent retailers (Fire & Flower, Starbuds, and OnePlant), and Shoppers Drug Mart. By securing relationships with these outlets, Aleafia is well positioned to capitalize on the Canadian market and benefit from the change in the types of products that can be sold.
Earlier in the article, we briefly highlighted Aleafia Health from a valuation standpoint and want to shed more light on this aspect of the story. When compared to its peers, we believe that the company has one of the most attractive growth profiles and find this to be of the utmost importance. A few months ago, Eight Capital issued Aleafia Health a Buy rating and a $3 price target. At current levels, the price target issued by Eight Capital indicates that Aleafia Health is undervalued and has substantial upside potential.
In regard to the cannabis 2.0 opportunity in Canada, we expect the acquisition of Emblem to play an important role in the way Aleafia Health is able to capitalize on it. Through Emblem, Aleafia Health acquired additional cannabis strains, oil formulations, capsules, and an oral dose-metered spray. Going forward, we expect Emblem’s product portfolio to continue to drive product innovation for Aleafia Health and are bullish on this.
Going forward, Aleafia Health will leverage Emblem’s extraction and product innovation to sell high-margin cannabis products directly to its patient base and to recreational consumers. Over the next year, we expect this to be a major value driver for the company and believe that the market does not fully appreciate this aspect of the story.
During the last year, several Canadian cannabis producers announced plans to capitalize on emerging international cannabis markets. Many of these companies have failed to execute on this opportunity and we believe that the progress that Aleafia Health has made in Australia and in the EU is significant.
Through Emblem, Aleafia Health has been able to enhance its leverage to the EU via a joint venture with German pharmaceutical wholesaler Acnos Pharma GmbH. We are bullish on the German medical cannabis market and this relationship provides Aleafia Health with the ability to enter new markets in the EU. Going forward, we expect international markets to support revenue growth for the entire company and are bullish on this opportunity for the business.
An Opportunity to be Watching
2020 will be a make or break year for many cannabis companies and we believe that Aleafia Health will prove to be a banner year for the business. From international markets to the cannabis 2.0 opportunity in Canada, the company is well positioned to capitalize on high-growth verticals of the cannabis industry and believe that the opportunity is flying under the radar.
Over the next year, we expect to see Aleafia Health significantly increase the amount of cannabis it is producing on an annual basis and this will be a massive value driver for the entire business. Through the increased production capacity, Aleafia Health will be able to further scale the business and enter new markets and this is an opportunity that we are excited about.
When compared to Canada, the economics associated with the cannabis industry in the EU are much more attractive. In the EU, there are higher barriers to entry, and this provides Aleafia Health with an early mover advantage. The company has several major potential catalysts for growth, and we will monitor how the management team continues to drive the story forward.
Although Aleafia Health has been executing at a very high level, the shares have been under pressure. We believe that the company represents a compelling play on the burgeoning cannabis market, and this is an opportunity that investors should be watching. To learn more about Aleafia Health, please contact email@example.com to be added to our distribution list.
Pursuant to an agreement between StoneBridge Partners LLC and Aleafia Health Inc. (ALEF) we have been hired for a period of 180 days beginning August 15, 2019 and ending February 15, 2020 to publicly disseminate information about (ALEF) including on the Website and other media including Facebook and Twitter. We are being paid $8,000 per month (ALEF) for or were paid “ZERO” shares of unrestricted or restricted common shares. We own zero shares of (ALEF), which we purchased in the open market. We plan to sell the “ZERO” shares of (ALEF) that we hold during the time the Website and/or Facebook and Twitter Information recommends that investors or visitors to the website purchase without further notice to you. We may buy or sell additional shares of (ALEF) in the open market at any time, including before, during or after the Website and Information, provide public dissemination of favorable Information.