Canadian Licensed Producers (LPs) have been one of the hottest investment opportunities and the sector continues to trend higher. The cannabis sector has caught the attention of the mainstream media after Constellation Brands (STZ) made a $5 billion investment in a Canadian LP and after Coca-Cola (KO) expressed interest in this burgeoning market.
In 2014, we started covering the cannabis sector and have been monitoring this emerging sector since inception. We believe that we have had our finger on the pulse of the cannabis industry and this has been able to put us ahead of the curve.
Today, we are issuing a special update on a company we have been favorable on. The company, Emerald Health Therapeutics (EMH.V) (EMHTF), has been able to secure some of the best strategic partners in the world, has been executing flawlessly on a global growth strategy, and is trading at a valuation that is very attractive when compared to its peers.
Emerald Announces a Milestone and Signs a Strategic Alliance
In late August, Emerald Health Therapeutics signed a term sheet to form a strategic alliance with Factors R&D Technology, Inc. (FTI), a division of Factors Group of Nutritional Companies Inc. In this exclusive arrangement, FTI will provide Emerald pharmaceutical-grade, industrial-scale manufacturing capacity as well as expertise in GMP-level extraction, softgel production, and packaging focused on the rapidly emerging market opportunities for medicinal cannabis in Canada and internationally.
This is a very strategic relationship and we expect it to prove to be a major value driver for the company. When it comes to significant strategic partners, Emerald Health has done an outstanding job and we think the relationship with FTI will prove to be as significant as the relationship with Village Farms International (VFF.TO) (VFFIF).
Factors Group is Canada’s largest nutritional supplement marketer and manufacturer and has over 1 million square feet of production facilities, R&D, and quality control laboratories and distribution centers. This provides Emerald with strategic assets, high-level capabilities, and significantly enhances the company’s growth prospects.
Emerald has clearly outlined its goal to focus on intellectual property and value-added product development. Achieving these goals would allow the company to produce and sell products that should command higher margins, an important aspect of the story. Securing this alliance with a very established and prominent player in the natural health products space is clever. While most investors seem to be entranced by the combination of beverages and cannabis, Emerald is moving forward in a segment of the market that is equally significant in its manufacturing and product expertise, and its engagement with highly relevant and motivated consumers.
FTI Considers Emerald to be a Top-Tier Partner
FTI conducted significant due diligence prior to announcing this agreement and considered Emerald to be the best fit due to its commitment to high quality research and its position as a leader in medicinal cannabis product development.
Through this strategic alliance, FTI will initially provide Emerald with access to a manufacturing facility that is one of the largest, if not the largest, in Canada. This operation has extraction infrastructure capable of processing up to 1 million kg of biomass annually. The state-of-the-art facility can also produce up to 600 million softgel capsules per year. This capacity would make Emerald one of largest potential softgel cannabis product producers in the world, positioning it strongly within the soon-to-be leading federally legal recreational cannabis marketplace in the world, Canada, as well as for potential global opportunities.
This agreement will significantly benefit Emerald from a technology standpoint as FTI will provide a technology transfer of its extraction methods and production protocols to allow Emerald to establish a future production and manufacturing facility closer to its cultivation facilities. This will play a major role when it comes to distribution and will make this process more economical and efficient.
The relationship with FTI will also benefit Emerald Health Naturals (EHN), the joint venture of Emerald and Emerald Health Bioceuticals. Under the term sheet, FTI and EHN will sign an exclusive agreement that will allow the companies to collaborate on product innovation, marketing, and distribution strategies to provide a range of products containing cannabinoids and other herbal formulations to support the human endocannabinoid system to the global health products market. The collaboration will initially focus on manufacturing, distribution, and sales of EHN’s current product line.
FTI will be leveraged for the success of this venture and this makes us even more confident in the potential for success. As part of this arrangement, EHN will issue shares to FTI representing 25% of its issued share capital. This will make FTI a significant owner of EHN and we are closely monitoring how the teams execute on this.
Pure Sunfarms: A Major Value Driver for Emerald
Earlier this month, Emerald Heath’s joint venture with Village Farms, Pure Sunfarms, received its fourth amendment from Health Canada, increasing the size of production area to 550,000 sq. ft. This was a significant development and the newly licensed area is expected to be in full production by mid-October of this year.
Half of Pure Sunfarms’ 1.1 million square foot Delta 3 production facility has been licensed by Health Canada and we are favorable on the continued execution. The joint venture will be able to be one of the largest producing sites in the world and holds options on two additional greenhouses that could increase aggregate production to more than 300,000 kilograms a year. This would make the joint venture a massive player in the cannabis market.
The joint venture was recently granted a cannabis sales license from Health Canada and is able to start generating revenues. We are closely monitoring how Pure Sunfarms continues to execute and are very favorable on the growth potential from this asset.
A Company Worth Watching
Smokeless cannabis products are a burgeoning vertical within the legal cannabis industry and we expect this segment to continue to experience above average growth for years to come. Through FTI, Emerald Health will be highly levered to this opportunity and we think this will prove to be a major growth driver.
Although Emerald Health has rallied well off its recent lows, we consider the shares to be undervalued compared to its peers. The granting of a Sales License from Health Canada and recently announced three supply agreements with BC, Ontario, and Newfoundland represent major milestones for the company and we are monitoring how the team continues to execute.
Over the next few months, we expect Emerald Health to take additional steps that will reflect the scaling and advancements that they have laid out as part of their business plan and that will justify our bullish outlook. The Canadian cannabis producer has been working tirelessly to make sure it is positioned to capitalize on new and burgeoning growth opportunities. This is a stock that investors need to be watching.