During the last year, the Canadian cannabis sector has been under heavy pressure and several high-profile companies have recently filed for bankruptcy.
Although the trend is concerning, we believe that the market will be stronger because of these developments in the long term. The cannabis industry is an emerging opportunity comprised of companies that have raised more than $5 billion in the aggregate. Many of these companies have failed to execute on previously announced growth projects and the market has punished them for it.
When it comes to the Canadian cannabis sector, we are working to identify operators that are well positioned for growth, that are led by a management team focused on profitability and that are well capitalized and well positioned to take advantage of strategic growth opportunities. Going forward, we believe that selectivity will be as important as ever when it comes to the Canadian cannabis market. Today, we want to highlight an operator that has an attractive risk-reward profile and a compelling valuation.
The company, Aleafia Health Inc. (ALEF.TO) (ALEAF), has recorded several major milestones over the last year and has attractive catalysts for growth. With access to more than $35 million, the company is well capitalized and is well positioned to grow the business. Through a series of organic and inorganic growth initiatives, the Canadian cannabis producer is executing on an international growth strategy and is capitalizing on the opportunities in Australia and in the European Union (EU).
A Diversified Opportunity that has Several Revenue Streams
Over the next year, we expect Aleafia Health to report strong revenue growth as its most recent quarterly earnings report was impressive. During the quarter, the Canadian cannabis producer generated a profit and recorded substantial revenue growth. This is a trend that is expected to continue, and we believe that Aleafia Health has several attractive verticals for growth. We have highlighted these below and find this to be significant:
- Canada’s medical cannabis market: In the back half of 2019, Aleafia Health reported a substantial increase in the number of medical cannabis patients. We expect to see ramping revenues from the medical side of the market and are bullish on the amount of revenue that can be generated through its growing patient base
- Canada’s recreational market: From a distribution standpoint, Aleafia Health has been nothing short of an execution story and is selling product in 4 provinces. The company has secured strategic partnerships when it comes to the recreational market and we expect this be a major growth driver
- International markets: Aleafia Health has been capitalizing on the cannabis opportunity in Australia and in the EU. We expect this to be a focal point for the business and for it to serve as a major growth driver
- Cannabis 2.0: This covers the change in the landscape of the Canadian market from a product standpoint. Aleafia Health is well positioned to capitalize on this aspect of the industry and we expect it to be a major growth driver over the long-term
- Cannabis clinics: We believe that the company is well positioned to increase its share of the medical cannabis market due to its unique integrated health and wellness ecosystem. We expect the clinics to support growth on the medical side of the business and find this to be significant.
Forms a Strategic Agreement with a Leading California Cannabis Brand
One of the ways that Aleafia Health has been able to differentiate itself is through its focus on brands and we believe that this aspect of the story is not appreciated by the street. When it comes to the US cannabis market, edibles are one of the most highly sought after products by consumers. We expect to see similar demand for these products in Canada and are favorable on the company’s focus on this vertical.
Last month, Aleafia Health announced a definitive licensing agreement with Kinstate to bring its award-winning, cannabis-infused sublingual strips brand and underlying sublingual strip technology to the Canadian medical and recreational cannabis market. Kinstate has a proven track record and its portfolio of sublingual strips are available in 100+ retail outlets in California.
One of the reasons we are favorable on the arrangement is due to how it is structured. We believe that the agreement provides Aleafia Health with the opportunity to capitalize on emerging markets and we find this to be significant for the long-term story. The agreement provides the company with the exclusive Canadian rights to manufacture, market and sell certain Kin Slips products. It also provides Aleafia Health with the right to use the associated proprietary formulations, manufacturing methodology and intellectual property provided by Kinstate, as well as the opportunity to offer the format in certain international markets.
Aleafia Health expects to start selling the new cannabis infused products in the second quarter of 2020 and we will monitor how the management team is able to execute on this. We expect to see strong consumer demand for these products and are bullish on the amount of value that can be created through the agreement in Canada and abroad.
An Opportunity with Substantial Growth Prospects
We believe that Aleafia Health has an attractive valuation, substantial growth prospects, a strong balance sheet, and a favorable risk-reward profile. At current levels, Aleafia Health is trading well below the average price target that has been issued by Canadian broker-dealers. As the management team continues to execute and de-risk the operation, we expect to see these firms increase estimates for the company and we find this to be significant.
During the last year, Aleafia Health has been nothing short of an execution story and has recorded several major milestones. During a time where Canadian cannabis companies are coming under pressure due to liquidity concerns, the company has been able to strengthen its balance sheet as total expenses substantially declined during the third quarter (for the second consecutive quarter). Aleafia Health has been able to significantly increase the scale of its business and at the same time to reduce its expenses have declined and we believe that this is an important trend.
At current levels, we believe that Aleafia Health has a compelling valuation when analyzing the company’s growth forecasts, balance sheet, and potential catalysts. When compared to its peers, the company is trading at a substantial discount and we find this to be significant. Aleafia Health is in the early innings of a major growth cycle and this is an opportunity that we are closely following.
If you are interested in learning more about the Canadian cannabis producer, please email firstname.lastname@example.org to be added to our distribution list.
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