Equity Research Healthcare – Cannabis | May 23, 2019
Patrick Smith | Analyst | Ubika Research Patrick@UbikaResearch.com | (647) 444-5506
Christopher, Bednarz MBA | Associate | Chris.B@UbikaResearch.com | (416) 558-5548
John Brooker | Associate | john@ubikaresearch.com | (905) 616-6185
Investment in Little Green Pharma increases Australian exposure and potential upside. On May 22, LGC Capital announced a further investment in Little Green Pharma (LGP), an Australian licensed medical cannabis producer, for A$5.5M from a non-executive founder. The investment brings the Company’s ownership in LGP to 40.4% from 14.1%. The closing of this transaction is expected to be within 95 days of signing the agreement and is subject to TSXV approval.
Little Green Pharma brings first-mover advantage in Australia. Importantly, LGP is Australia’s first and only local medical cannabis producer. Of note, LGP currently has 400 registered medical patients. While this may seem small, the Australian medical program is still in its early days, as there is ~6,400 patients in the program. For reference, the Australian government does not disclose where the remaining 6,000 patients source their cannabis from, however, we assume most Australian imports are from Canada, as ~1,500 kg was exported in 2018 (Statistics Canada). Refer to Figure 1 on Page 2 for a visual depiction of the growing Australian medical cannabis market.
LGP is poised to become a leader in the emerging Australian medical cannabis market. We are forecasting that Little Green Pharma can achieve revenues of $30.0M by F2022E (was $11.2M), based on LGP reaching 200,000 sq. ft. (400,000 sq. ft. capacity). We believe that the Australian legal cannabis market is 2-4 years behind the Canadian market and that Little Green Pharma is positioning itself to become a major global producer that can rival Canadian LPs. LGP has international supply agreements for the German market and has plans to expand into the Asian market.
LGC CAPITAL LTD. TSXV:LG
(Currency is CAD$ & estimates are attributable, unless noted otherwise)Last Price $0.10
Target Price$0.20
Potential Return100%
Net Asset Value Per Share $0.25
52 Week Low / High$0.08 / $0.25
Average Daily Volume (30-Day)544K
| CAPITALIZATION | Basic | Diluted |
|---|---|---|
| Shares Outstanding (M) | 416.2 | 610.3 |
| Market Capitalization ($M) | $41.6 | |
| Enterprise Value ($M) | $41.0 | |
| Last Reported Cash Balance ($M) | $2.9 | |
| Last Reported Total Debt ($M) | $2.3 |
| LGC CAPITAL OPERATIONS | F2019E | F2020E | F2021E |
|---|---|---|---|
| Flower Produced (kg) - 100% | 7,300 | 23,600 | 39,500 |
| Revenue ($M) | $12.9 | $37.4 | $66.6 |
| Cash Costs ($ per gram) | $1.03 | $1.09 | $1.04 |
| AICC ($ per gram) | $2.30 | $2.30 | $1.64 |
| EBITDA ($M) | -$1.4 | $10.4 | $29.2 |
| FCF ($M) | -$14.0 | -$14.9 | $4.3 |
| Total CAPEX ($M) | $9.4 | $21.3 | $14.9 |
| CFPS | $0.00 | $0.01 | $0.03 |
| Cash At Year End ($M) | $0.6 | -$4.6 | -$4.9 |
| Debt At Year End ($M) | $2.5 | $6.0 | $6.0 |
| Relative Valuation | P/NAV | EV/EBITDA | |
|---|---|---|---|
| 2019E | 2020E | ||
| LGC Capital Ltd | 0.4x | nm | 3.9x |
| Cannabis Holdings Companies | n/a | 29.6x | 10.6x |
| Gold and Oil Royalty Companies | 1.3x | 9.5x | 8.5x |
| MAJOR SHAREHOLDERS |
|---|
| Management & Insiders (21.3%) | DISCLOSURE CODE: |
| Disclosure: None (See back page for further details) |
ATTRIBUTABLE REVENUE & EBITDA FORECAST
Valuation
Accretive investment in LGP. We have updated our estimates to reflect the additional 25% stake in Little Green Pharma. Our NAV contribution for Little Green Pharma increased to 28% (was 15%). Overall, our NAVPS increased to $0.25 (was $0.23) and our F2021E EBITDA estimate increased to $29.2M (was $27.3M). For reference, refer to our new and old proportional NAV breakdowns on Figure 2 & 3 on Page 2.
Trades at a discount to peers. LGC currently trades at 3.9x our F2020E EBITDA estimate, a discount to cannabis holding companies and gold and oil royalty companies, which trade at an average of 8.5x and 10.6x, respectively. We believe this gap should close as LGC begins to make material cash flow.
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