After highlighting three Canadian licensed medical marijuana producers as potential acquisition targets, we received requests for more information regarding Emblem Cannabis Corp.
The company, Emblem (EMC.V) (EMMBF) is focused on the production of medical marijuana and is in the middle of a major expansion. The licensed medical marijuana producer is laser focused on cannabis oils and smokeless products which is a very attractive aspect of the business.
Although we consider Emblem to be an acquisition target for several reason, we are only going to focus on the three main factors.
- Valuation: Market cap of approx. $170 million is too cheap to ignore
- Focused on Expansion and Cannabis Oils: Two very important themes for Canadian LPs
- Management Turnover: Led by a new CEO and the team has not executed as expected
In the Middle of a Major Growth Cycle
The trend toward smokeless marijuana products continues to increase and Emblem is expected to be a leader in this space. In 2017, Emblem purchased state-of-the-art oil extraction equipment and has invested millions-of-dollars into this division.
The medical marijuana producer is in the middle of a major fully funded expansion initiative that will significantly increase total production capacity. The increased capacity will be a major catalyst for Emblem as it will lead to very strong revenue growth.
One of the most significant profit drivers for licensed producers has been cannabis oils. This higher margin product increases the shelf life of medical cannabis and is attractive to consumers. Emblem only recently received its sales license for cannabis oils and is just starting to recognize the benefits of this revenue stream.
An Attractive Operating Structure
Emblem is comprised of three distinct divisions which can create value for each other as well as improve the value proposition of the entire company. Its three divisions are focused on cannabis production through Emblem Cannabis, patient education through GrowWise Health, and pharmaceutical production through Emblem Pharmaceuticals.
Emblem Pharmaceuticals is a very attractive aspect of the business as it offers investors leverage to not only the legal cannabis market but also the cannabis pharmaceutical market. In 2018, Emblem Pharmaceutical President John Stewart will lead the launch of cannabinoid-based medications in customary pharmaceutical dosage forms such as liquids, gel caps, oral sprays, and inhalers.
Stewart has over 30 years experience developing and commercializing pharmaceutical products. He has launched 11 new products, including OxyContin, and was the worldwide President and CEO of Purdue Pharma, the largest privately held pharmaceutical company in the world.
Valuation: Too Cheap to Ignore
Over the last six-months, Canadian licensed medical marijuana producers have been in rally mode and valuations have become very rich. After this rally, several of these companies have market caps that are in the $1 billion to $6 billion range.
Emblem’s market cap is approx. $170 million and we find the valuation to be very cheap. The medical marijuana producer owns assets that are very attractive to any of its competitors and it is only a matter of time until the company is acquired.
If you take a look at Newstrike Resources (HIP.V) (NWKRF), which has less assets and less potential when compared to Emblem, the company has a market cap of approx. $500 million. Although we find this valuation to be inflated, it just proves that Emblem is a very undervalued opportunity.