During the last quarter, the Canadian cannabis industry has been under pressure and this is a trend that we have been following.
In 2014, we started covering the cannabis sector and have recognized this trend on a year-over-year basis. Although we are not surprised by the recent weakness, we believe that the industry is much better positioned when compared to the prior year and believe that this is something that investors need to be aware of.
Some companies have been more impacted than others by this weakness and we have been monitoring these price movements. Today, we want to highlight a company that is trading at a significant discount and has been nothing short of an execution story. The company, Aleafia Health (ALEF.TO) (ALEAF) has massive growth prospects and is in the middle of a major expansion.
Aleafia Health has now received a positive upgrade from Eight Capital which issued the company a Buy rating and a $3 price target. This was a significant development that will result in increased awareness for the company. Over the next year, we expect to see Aleafia Health significantly advance its fundamental story and are favorable on the growth prospects associated with its expansion. The company recently completed a major acquisition of a Canadian Licensed Producer (LP) and we believe that the market under-appreciates the growth prospects of the combined company.
An Opportunity to be Excited About
One of the reasons we are excited about Aleafia Health is due to the growth potential on account of its Canadian footprint. The Canadian cannabis producer is in the middle of a major expansion of its three cultivation facilities and once completed, the company 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.
When it comes to having distribution in Canada, Aleafia Health is well positioned and 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. This represents a massive opportunity for the Canadian cannabis producer and we will monitor how the team is able to execute on this growth initiative.
Earlier this year, Aleafia Health completed the acquisition of Emblem, a leading Canadian cannabis producer, and we are bullish on the growth prospects of the combined company. We expect the company to recognize massive synergies through this acquisition and are favorable on how it has improved Aleafia Health’s product portfolio. The Emblem acquisition provided the company with additional cannabis strains, oil formulations, capsules, and an oral dose-metered spray.
We expect Emblem’s product portfolio to continue to drive product innovation for the combined company through its 30,000 sq. ft. production facility and we are bullish on this. Aleafia Health will be able to leverage Emblem’s extraction and product innovation to sell high-margin medical cannabis directly to its patient base. This represents a significant opportunity for Aleafia Health as well as its patient base, which can access Emblem’s differentiated high-margin derivative cannabis products. Over the next year, we expect this to be a major value driver for the combined company and will monitor how the team executes on this.
Levered to Emerging International Cannabis Markets
The acquisition of Emblem has had a significant impact on Aleafia Health’s leverage to the international cannabis opportunity. The company will benefit from Emblem’s previously announced 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. We will monitor how the team executes on this opportunity and believe that this is an important part of the growth story.
In April, Aleafia Health expanded on its relationship with CannaPacific and increased the size of its investment in the Australian medical cannabis company that is federally licensed to cultivate and research cannabis. The investment immediately follows the closing of CannaPacific’s acquisition of a 108,000 sq. ft. greenhouse facility that will be used for cannabis cultivation and for the eventual sale to medical patients and global exports.
This comes after Aleafia Health made its initial investment in January and we are favorable on the leverage to the Australian cannabis market. CannaPacific’s management team is comprised of industry leaders in the fields of medicine, pharmaceutical manufacturing and sales, oncology, hospital management, plant science and cannabis cultivation.
CannaPacific also intends to leverage Aleafia Health’s global cannabis health and wellness ecosystem across the company’s four divisions: Aleafia Campus, Health & Wellness Clinics, FoliEdge Academy, and eCommerce Consumer Marketplace. We are favorable on the growth prospects associated with this relationship and will monitor how the team executes on this.
We believe that it is important for Canadian cannabis companies to be focused on the international opportunity and are favorable on the opportunity in Germany and Australia. We are of the opinion that the market does not associate much value with these opportunities and expect this to be a major catalyst if the company is successful.
A Company with Significant Potential Catalysts for Growth
One of the reasons we are excited about Aleafia Health is due to the number of potential catalysts. Over the next year, the company has a number of major avenues for growth and we find this to be significant. When looking at the Aleafia Health opportunity, we believe that the most significant potential catalysts include the following:
- Nasdaq Listing: Aleafia Health submitted an application to list on the Nasdaq Exchange which should improve liquidity and investor awareness moving forward.
- Facility Expansion: The company is in the middle of a major expansion and currently has a licensed footprint of 22,000 sq. ft. Aleafia Health is expanding to approx. 1.3 million sq. ft. of cultivation in the second half of 2019 and this includes 1.1 million sq. ft. of an outdoor grow. We believe that the increased production capacity will be the primary driver of revenue growth on a go-forward basis.
- Product Development: Aleafia Health has a 30,000 sq. ft. production facility which will facilitate the development of cannabis derivative products. Emblem has a proven track record of success when it comes to the cannabis concentrate opportunity and we expect to see the company release derivative products in late 2019/early 2020. When it comes to the derivatives market, we believe the company will be able to leverage its expertise as well as its partnerships with GreenSpace Brands, Dosecann and Canntab to enhance the development of its derivatives portfolio.
- Provincial Agreements: Aleafia has secured supply agreements with Ontario, Alberta and British Columbia, and is a registered supplier in Saskatchewan. Over the next year, we expect Aleafia to secure supply agreements with additional provinces as it expands its cannabis cultivation platform. We view additional supply agreements as a significant potential catalyst for Aleafia Health given the increased brand exposure and revenue growth it would provide.
- International Markets: Earlier in this article, we highlighted the company’s leverage to international cannabis markets. With leverage to Australia and Germany, Aleafia Health is targeting emerging cannabis markets and we will be keeping an eye on this aspect of the business. Over the next year, we expect the international opportunity to become even more significant for the company and are bullish on the growth prospects associated with this.
Aleafia Health 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 capitalize on new opportunities in Canada and abroad and we are bullish on this aspect of the story.
Through the acquisition of Emblem, Aleafia Health will be able to make a major splash in the cannabis concentrate and cannabis derivate market. These are high margin products and we expect this opportunity to prove to be a major value driver for the overall business. Over the next year, we expect to see this business ramp up and this is something we are following.
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 firstname.lastname@example.org.
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