Aleafia Health Q2 Recap: Medical Patient Growth is Blossoming

Aleafia Health Inc. (TSX:ALEF), one of the Canadian marijuana stocks, reported Q2/19 financial results before markets opened on August 14, 2019

SmallCapPower | August 16, 2019: Aleafia Health Inc. (TSX:ALEF), one of the Canadian cannabis stocks with a network of 40 cannabis clinics across Canada, reported Q2/19 financials results before markets opened on August 14, 2019. The financials were highlighted by revenue of $3.8M, an increase of 152% quarter over quarter. Importantly, we note that this quarter did include significant revenues from Emblem (which closed on March 6, 2019).

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Figure 1: Financial HighlightsSource: Ubika, Company Reports

Cannabis revenue increased 356% quarter over quarter. Net revenues for the quarter came in at $3.8M ($2.5M from cannabis and $1.4M from research), a slight beat to consensus at $3.6M. This was driven by an increase in adult-use cannabis sales and clinic revenue. Gross profit margins before fair value adjustments were 15%, which was due primarily to higher production costs incurred during the expansion of its Niagara Greenhouse.

Aleafia’s 1.1M sq. ft outdoor grow is progressing well and the plants have begun flowering. The Company plans to harvest in October 2019, and we would expect to begin to see revenues from the grow in Q4/19 and Q1/20. Recall, on September 11, 2018, Emblem (acquired by Aleafia Health in 2019) entered into a five-year, 175,000 kg supply deal with Aphria (TSX:APHA). Aphria is expected to supply Emblem with 25,000 kg in the first year, ramping up to 45,000 kg in the fifth year. Emblem expects to begin to receive wholesale shipments of cannabis from Aphria as scheduled and will use the cannabis in the production of Emblem products. In our view, the outdoor grow and wholesale cannabis shipments should significantly add to the Company’s topline in subsequent quarters.

Figure 2: Aleafia’s Niagara Greenhouse Facility

Source: Aleafia Health

Sustained cost reductions and strong cash position. SG&A fell 44% over the previous quarter, driven by operational synergies from the Emblem acquisition and included head count reduction. Additionally, ALEF increased its cash position to $58.0M in Q2 (was $36.8M in Q1/19). With a strong cash position, Aleafia Health is fully funded to complete its Port Perry facility and is ready to begin construction of its Paris extraction & processing facility and finish the retrofit of its Niagara Greenhouse. Aleafia is expecting to achieve an annual run-rate of 150,000 kg of cannabis production by the end of calendar year 2019 and is targeting cash costs of less than $1.00/gram.

Continued expansion into international markets. On May 6, 2019, ALEF announced its entrance into the German cannabis market by expanding the scope of Emblem’s joint venture (JV) with Acnos Pharma GmbH, a German wholesale provider of pharmaceuticals. The JV allows Aleafia Health to export medical cannabis into Germany. This follows an announcement from April 11, 2019, when Aleafia announced it paid A$540K to maintain its 10% stake in CannaPacific. CannaPacific is one of the largest potential cultivators in Australia, with 108,000 sq. ft of greenhouse cultivation in New South Wales Australia.

Growing medical patient count. Aleafia Health has grown its patient count by 27% to 8,861 patients on August 13, 2019, from 6,959 patients, which is the highest patient count recorded. With a network of cannabis clinics, Aleafia has seen about 65,000 patients to date and is focused on significant investments in cannabis research. The Company is currently working on a study with Cronos Group (TSX:CRON) to look at the effects of cannabis on sleep. On January 25, 2019, Aleafia announced results of a peer-reviewed journal titled, Reduction of Benzodiazepine Use in Patients Prescribed Medical Cannabis, featuring a cohort of 146 patients from its Cannabo medical clinic. The study found that 45% of patients regularly consuming benzodiazepines had stopped taking the medication within approximately six months of beginning medical cannabis. In our view, with a strong commitment to medical research, Aleafia Health is well poised to onboard some of the 70,000 CannTrust (TSX:TRST) patients that will be looking for a new LP.

Figure 3: Aleafia Comps Table

Source: Ubika, Capital IQ

Trades at a discount compared with peers. Aleafia Health trades at a 9.1x 2020E and 4.1x 2021E EV/EBITDA , a discount to Canadian majors, which trade at a consensus average of 30.2x and 16.0x multiples, respectively. We believe that this valuation gap should close overtime as the Company books revenues from its outdoor grow and upon successful ramp-up of the Niagara Greenhouse, Port Perry facility, and the Paris extraction & processing center. Additionally, the Company trades at one of the lowest EV/funded capacities at 2.0x, compared with an industry mean of 17.0x.

Shares of Aleafia ended Thursday’s trading session 4.4% lower at C$1.10. Aleafia Health stock trades at a market cap of C$312.8 million.

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