ICC Labs is a Way to Play Emerging Markets Cannabis Demand

ICC Labs Inc. (TSXV:ICC) looks appealing for the long haul, especially to a bigger cannabis player looking to establish a presence in South America

SmallCapPower | June 27, 2018: ICC Labs Inc. (TSXV:ICC) (Frankfurt:2Q9) is a licensed and authorized producer, developer and vendor of recreational cannabis, medicinal cannabis extracts and derivatives, as well as industrial hemp in Uruguay. The Company is headquartered in Vancouver, British Columbia, and has an operational office in Montevideo, Uruguay. ICC Labs is exploring opportunities in emerging cannabis markets, such as Colombia, where medical cannabis is legal.

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ICC Labs trades at a market capitalization of $208.8 million on the TSXV and currently trades at a discount to peers at 7.5x 2019E EV/EBITDA compared to the median for junior Canadian cannabis producers, which trade at an average of 14.7x. On the back of its focused approach towards the recreational market and international expansion, ICC Labs looks appealing for the long haul, especially to a bigger cannabis player looking to establish a presence in South America.

Investment Thesis

  • Distinct business segments
  • Expanding global operations

Distinct business segments

ICC Labs operates in two distinct business segments that serve two very different markets – recreational cannabis and cannabis extraction. While its recreational cannabis segment is for the domestic market, the Company’s cannabinoid extraction segment is focused on the international market.

ICC Labs is licensed by the Government of Uruguay to produce and distribute cannabis. The sales are carried out through authorized pharmacies responsible for selling to registered customers. Currently, ICC Labs has a license to produce up to two tonnes per year, which is expected to rise to 10 tonnes per year. As of December 31, 2017, the Company had sold 266 kilograms of recreational cannabis, generating ~$218K in revenue. Currently, ICC Labs is increasing its production to meet the commitment of producing and distributing two tonnes of recreational cannabis by 2018-end. With the rising demand, ICC Labs is expected to enhance its production year-over-year. As of May 30, 2018, ICC had 22,618 recreational cannabis plants and 1,123 kilograms of recreational cannabis in inventory.

ICC Lab’s cannabinoid extraction segment is focused primarily on medicinal cannabis extracts and derivatives from hemp. The production of industrial hemp products is expected as well. In May 2017, ICC successfully completed the establishment of its first 21,528 square foot medicinal greenhouse. As of May 30, 2018, ICC Labs has sowed about 5,000 Helena seeds, which has yielded 106 kilograms of dried CBD cannabis flowers. Additionally, the Company has finished sowing its second greenhouse crop with CW2A-B strain.

ICC Labs has completed the construction of its laboratory in Uruguay’s Science Park, which is expected to become a permanent analytical laboratory after the Company’s larger-scale CO2 extraction facility is constructed and begins running at full capacity.

Expanding global operations

ICC Labs is focused on expanding its presence across the globe, especially in emerging markets where cannabis is legal. The Company received two licenses for its wholly-owned subsidiary in Colombia, ICC Colombia S.A.S., on January 3, 2018, from the Ministry of Justice and Law of the Republic of Colombia. One of the licenses allows ICC Labs to cultivate non-psychoactive cannabis plants for producing several medicinal cannabis-based products for domestic and international distribution. The other license permits the Company to receive cannabis seeds under the Colombia regulatory regime and utilize such seeds for its operations. The two licenses are valid for a period of five years and can be renewed upon request within three months of expiration.

ICC Labs has signed an agreement with Nuuvera’s subsidiary, Avanti Rx Analytics Inc. (ARA), to export CBD crystal. As per terms of the agreement, Avanti will purchase 150 kilograms of CBD in 2018, provided ICC Labs complete the formalities for GMP certified laboratory.

Furthermore, on February 9, 2018, Colombia’s Ministry of Justice and Law granted ICC Colombia a license to cultivate psychoactive cannabis plants for medicinal purposes for domestic and international distribution. The Ministry also sanctioned a license to manufacture cannabis derivatives for medicinal usage.

Outlook and Valuation

In terms of valuation, ICC Labs trades at a market capitalization of $208.5 million on the TSXV and currently trades at a discount to peers at 7.5x 2019E EV/EBITDA compared to the median for junior Canadian cannabis producers, which trade at an average of 14.7x. The Company’s focus on the upcoming recreational cannabis market as well as cannabinoid extracts for medicinal usage could pay off in the long run, especially in emerging markets where cannabis is currently legal.

Disclosure: Neither the author nor his family own shares in the company mentioned above.

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