Significant synergies are expected with the merger of Hiku Brands Company Ltd. (CSE:HIKU) and WeedMD Inc. (TSXV:WMD)
SmallCapPower | June 8, 2018: Hiku Brands Company Ltd. (CSE:HIKU), a Canadian lifestyle brand company focused on medical cannabis, announced on April 19, 2018, that it has entered into an all-stock merger with WeedMD Inc. (TSXV:WMD) at $2.52/share, a 79% premium to the 20-day VWAP (a premium of 60% based on closing price on April 18, 2018). With an exchange ratio of 1.4185 to 1, Hiku and WeedMD will own 51.75% and 48.25%, respectively. Closing of the acquisition is anticipated this month. Overall, Hiku Brands expects the merger to create synergies by integrating Hiku’s brands and distribution channels with WeedMD’s scalable production capabilities.
Hiku Brands has grown through a series of vertical amalgamations, integrating cultivation, processing, branding and retail into a single corporation. The indoor production facilities are all located in British Columbia and Ontario. Pending closing of the acquisition, the future scalable greenhouse facilities in Strathroy, Ontario from WeedMD could dramatically enhance the Hiku’s production capacity (See Figure below). Of note, we have provided an analysis on WeedMD’s assets later in this article.
State-of-the-Art Production Facilities across Canada
Source: Company Presentation
Engaging Retail
Hiku Brands has retail stores across Canada. Currently, Hiku operates seven brand stores and cannabis retail location (through government run dispensaries), located in Ontario, Quebec, New Brunswick, Nova Scotia and Prince Edward Island, and plans to expand to 10 by the end of 2018. In addition to brand stores, up to 20-30 dispensing stores are expected to open this year in British Columbia, Alberta, Saskatchewan, Manitoba and Newfoundland. With EBITDA margin estimates of over 40%, Hiku Brands reports that retail locations are earning higher margins than traditional wholesale because of its vertically-integrated operations. Hiku Brands estimates the retail price to be $16.50 per gram and targets annual revenue between $2.5M and $5.0M. Supply partners include Aphria (TSX:APH) and Canna Farms, which ensure premium cannabis products are available at all retail stores.
Tokyo Smoke Brand Store
Source: Company Presentation
Balance Sheet and Valuation
As of the last reported financial quarter (Q1 – March 31/2018), Hiku had cash of $5.8M and debt of $12.8M.
Hiku Brands is trading at $1.26, down 56% since February 1, underperforming its benchmarks, the HMMJ Index and Canopy Growth Corp. (TSX:WEED), which decreased 1.4% and increased 43.8%, respectively, over the same period.
With a market-cap of $177.5M, Hiku has an EV/EBITDA FY2019 of 9.3x, a discount relative to its peer median of 12.7x. The Company has an average target of $3.88 and is covered by 2 analysts.
WeedMD Inc. – $1.70
WeedMD Inc. (TSXV:WMD) is an Ontario-based Licensed Producer under the ACMPR, growing and selling dried flower, oil, cannabis plants for medical purposes. The Company develops unique distribution channels with multiple revenue streams for both retail and wholesale.
Greenhouse Cultivation
Source: Company Presentation
Greenhouse Expansion
WeedMD currently operates a 25,620 sq. ft. indoor facility with a production capacity of 1,500 kg. The Company also entered into a strategic partnership with Perfect Pick’s Farms Ltd. Perfect Pick has a total of 610,000 sq. ft. state-of-house greenhouse facilities available for cannabis cultivation. Once fully retrofitted, WeedMD expects this should increase the Company’s annual production capacity to over 50,000 kg. The recent lease of 395,000 sq. ft. out of the 610,000 sq. ft. facilities is for a two-phase expansion plan, and the lease agreement also involves a purchase option to acquire 100% of Perfect Picker’s property, greenhouse facilities and infrastructure. With Phase I near completion, the first harvest of 20,000 kg is expected to take place in summer 2018. To further expand the capacity to 33,000kg, Phase II is anticipated to be completed by the end of 2018. In addition to the ability to rapidly ramp up production scale, this strategic partnership with Perfect Pick is reported to bring 40 years of combined cultivation expertise and skilled labour required to operate the facility.
610k Sq. Ft. Green House Expansion
Source: Company Presentation
Seniors Care Program Development and Long-Term Care Supply Contracts
WeedMD offers its comprehensive and proprietary care program along with its medical cannabis products to assist seniors. To-date, the Company has signed a series of long-term supply contracts with retirement homes, representing more than 3,000 beds in total.
State-of-the-Art Infrastructure
Source: Company Presentation
Balance Sheet
As of December 31, 2017, the Company had $24.7M in cash and $11.4M in debt.
Valuation
WeedMD is currently trading at $1.70, down 30.6% YTD. WMD has significantly underperformed its benchmark, the HMMJ Index, which was down 4.9% over the same period. To a certain extent, the Company’s stock price followed a similar trend as the whole cannabis market, slumping from a peak of $3.06 in January to a bottom of $1.24, recovering to the current level. With a market-cap of $191.0M, WeedMD has an EV/EBITDA FY2019 of 6.9x, a discount relative to a peer median of 12.7x. The Company has two analysts covering the stock with a current target of $2.83, representing 100% in upside.
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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