Cannabis producers prepare for growth

A number of established medical marijuana producers are preparing themselves for expansion and entry into the soon-to-be-legal recreational marijuana market. The MoneyLetter recently surveyed a number of security analysts’ reports and found these two producers preparing themselves for robust growth in the cannabis market.

Cannabis_ProducersAs Ottawa lays the regulatory framework to ensure that Canada plays a leading role in the global cannabis industry, companies like CannTrust Holdings Inc. (TSX—TRST) are poised to seize the opportunities.

“The Government of Canada is building a world-class cannabis industry,” says Toronto-based Mackie Research analyst Greg McLeish, who initiated his coverage of CannTrust with a ‘buy’ recommendation and a 12-month target share price of $17.50. “Its target is to provide regulated and restricted access to marijuana no later than July 2018.

“We forecast that total demand for marijuana will be approximately 795,000 kilograms (kg) in 2018. This equates to a market value of approximately $7 billion plus. To satisfy this requirement, a whole new industry is being built from the ground up. Canada is a global leader in the cannabis industry, which is allowing Canadian companies to leverage their expertise in international markets.”

Mr. McLeish says that the Vaughan, Ont.-based company is a Health Canada-approved licensed producer of medicinal marijuana. In fact, the company is at present capable of producing 23,600 kg annually. The Phase 2 conversion project at its Niagara greenhouse plant, which is under way, will boost cultivation capacity to 43,600 kg annually.

The analyst adds that the company is ideally positioned for expansion in the medicinal and recreational cannabis segments.

“CannTrust is dedicated to the ‘pharmaceuticalization’ of the medical cannabis market,” explains the analyst.

“Its product and intellectual property development teams consist of experienced pharmacists, nurses, medical doctors and growers, along with a clinically-trained client support team. This approach has resulted in the company reporting strong medical-marijuana patient growth. Management currently estimates that it is capturing 25 per cent of all new patients.”

The analyst adds that, at the end of 2017, CannTrust had more than 35,000 active patients, up more than 300 per cent year-over-year.

CannTrust is seeing robust demand for its ingestible cannabis oils that it first rolled out in August 2016. In the last quarter of 2017, in fact, these products accounted for around 64 per cent of total cannabis sales.

“In November 2017, CannTrust received Health Canada approval to export its pharmaceutically standardized medical marijuana products to international markets where medical marijuana is legal,” says Mr. McLeish.

“Management believes that international expansion is fundamental to its long-term growth and it is exploring opportunities in the EU (Germany and Denmark), Australia, Brazil and other countries. In addition, the company has already shipped product to Australia.”

With cash and cash equivalents adding up to around $25 million, CannTrust is on solid financial footing, says the analyst. And the company will be able to leverage its financial position to keep up with its capital expansion strategy and to address possible working capital needs.

Aurora Cannabis buys into Liquor Stores N.A.

Vancouver-based Aurora Cannabis Inc. (TSX—ACB) has agreed to make a strategic investment in Edmonton-based Liquor Stores N.A. Ltd. (TSX—LIQ) to develop a Western Canadian retail cannabis business. PI Financial analysts Jason Zandberg and Devin Schilling feel the impact from this collaboration is positive.

“Although we understand that LIQ’s cannabis stores will buy cannabis from more than just Aurora, we believe that Aurora will still likely benefit from this relationship, positioning the company to be a leader in Western Canada.

“We expect Alberta will implement a public/private cannabis retail model, and that LIQ’s well-established distribution network could provide a dominant position in the Alberta market.”

The analysts maintain their ‘buy’ recommendation for Aurora and a 12-month target of $15 per share. They also maintain their risk rating of ‘speculative’.

They caution investors that a broad market correction in the sector will negatively impact their target and recommendation. Their (unchanged) target represents an enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio multiple of 39 times their EBITDA estimate for fiscal 2020.

They forecast revenue of $50.1 million, $206.5 million, and $422.6 million for the fiscal years between 2018 and 2020. Their EBITDA estimates are $1.97 million, $61.6 million and $137.4 million for those same periods.

The investment with LIQ is structured in two phases. The initial investment by Aurora is for $103.5 million for approximately 19.9 per cent ownership interest in LIQ. In the second phase, Aurora will invest another $34.5 million, to increase its ownership interest to roughly 25 per cent—pending approval from LIQ shareholders at its next annual general meeting.

In addition, LIQ will issue warrants to Aurora that will allow the latter to increase its ownership interest up to around 40 per cent on a fully-diluted basis.

Liquor Stores intends to use the investment by converting some of its existing retail liquor outlets into cannabis retail outlets and establishing new cannabis retail outlets.

Liquor Stores has a well-established distribution network through its 231 retail liquor stores, and has extensive experience following best practices in the retail of adult-use, controlled products.

Aurora Cannabis will assist LIQ in staff training, and Messrs. Schilling and Zandberg believe this will be a significant differentiator when compared to government outlets.

British Columbia, Alberta, Saskatchewan and Manitoba have all announced plans to include private retailers in their provincial cannabis distribution. The analysts believe that LIQ and its strong Western Canadian presence made it the most sought-after partner to address this market.

Aurora Cannabis is a licensed producer of medical cannabis, with operations in Alberta and Quebec, including an 800,000-square-foot facility under construction at the Edmonton International Airport.

This is an edited version of an article that was originally published for subscribers in the March 2018/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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