The COVID-19 outbreak seems to be a transitory issue for the global economy as markets open back up and the cannabis industry will be a beneficiary of this.
During the last month, the cannabis sector has recorded mixed movements as Canadian companies that were once considered to be industry leaders have come off their high horse. The changing of the guard has created opportunities for other operators, and we conducted due diligence to better understand the companies that are benefiting from the transition.
Aleafia Health Inc. (ALEF.TO) (ALEAF) is an operator that we frequently highlight and expect the business to benefit from the changing landscape of the Canadian cannabis industry. On the medical side of the business, Aleafia Health has been grabbing additional market share as it continues to execute on initiatives while registering new medical cannabis patients at industry leading rates.
The substantial increase in the number of medical cannabis patients has translated into the business generating a profit on record revenue growth. Over the next year, we expect Aleafia Health to continue to report stronger revenue numbers and believe that the market does not fully appreciate this aspect of the story. Due the structure of the business, Aleafia Health will be able to produce premium low-cost cannabis and we expect this to translate into higher margins over the long-term.
Aleafia Health is led by a management team that has executed on a cost-effective growth strategy. The strength of the management team remains a key pillar of our thesis on the company and are favorable on the way the team has brought the business down a path to profitability. Starting with the acquisition of Emblem in 2019, Aleafia Health has been nothing short of an execution story and we are bullish on the amount of catalysts that it has for growth.
Positioned to Record Incremental Growth after a Major Milestone
Last week, Emblem reported a major milestone and reported to have secured a Health Canada license amendment for its phase II expansion of the Paris facility. The state-of-the-art 30,000 sq. ft. facility is entirely dedicated to the extraction, production, packaging and distribution of finished cannabis products. We are bullish on the amount of value that can be generated from the facility and expect it support growth over the long-term.
There are a number of reasons to be excited about the amendment to the facility and we want to briefly highlight this aspect of the story. First, the expansion will result in an exponential increase in Aleafia Health’s ability to produce and sell high-margin cannabis products. Second, the state-of-the-art facility is purpose built to meet European Union Good Manufacturing Practices (EU-GMP) standards and this will allow the company to export to the European Union (EU). Lastly, the facility provides Aleafia Health with greater scale and automation, which is expected to improve margins.
The expansion will allow Aleafia Health to process and package all the cannabis flower that is cultivated at its Port Perry outdoor cultivation site and its Niagara Facility. The expanded production facility increases the company’s licensed extraction, packaging and processing area from 2,500 sq. ft. to 20,000 sq. ft. The state-of-the-art facility features multiple automated packaging lines and rooms dedicated to the production of new product formats.
Over the next year, we expect Aleafia Health to expand the product line and expect the Paris facility to play a key role in the growth of the business. The license amendment accelerates the company’s cannabis 2.0 strategy and will allow it to produce new differentiated product formats. Aleafia Health has been preparing for this development for months and has built up a large amount of inventory of cannabis extracts to be used as input material for new formats for immediate use in the new facility.
Going forward, the name of the game is execution and we have a high conviction level when it comes the management team’s ability to deliver. Due to the amount of work that was conducted ahead of the granting of the amendment, we expect Aleafia Health to quickly bring new products to market and find this to be an attractive aspect of the story.
Aleafia Health is Reaching an Inflection Point
With the granting of the license amendment, Aleafia Health is positioned to enter its next phase of growth. Due to the management team’s cost-effective growth strategy, the company has a strong balance sheet and we expect the business to start generating substantially more cash flow from the expanded operations. The strength of Aleafia Health’s is an important differentiator when the business compared to its peers and we find this to be significant.
Aleafia Health is highly focused on the domestic and the international cannabis opportunity and we are favorable on the way the business has evolved so far this year. During the last month, the trend has been to the upside and momentum has been pushing higher. We believe that Aleafia Health is about to reach an inflection point and is opportunity to be aware of.
If you are interested in learning more about the Canadian cannabis producer, please send an email to email@example.com to be added to our distribution list.
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