Equity Research Healthcare – Cannabis | March 12, 2019
Patrick Smith | Analyst | Ubika Research Patrick@UbikaResearch.com | (647) 444-5506
Christopher, Bednarz MBA | Associate | Chris.B@UbikaResearch.com | (416) 558-5548
Company Description: LGC Capital Ltd. is a Canada-based investment holdings company focused on acquiring production, brands, and distribution in mature and emerging cannabis markets. Through its portfolio of companies, LGC Capital has a unique focus on international markets. As international markets continue to expand, the Canadian and U.S. markets should take notice, and international cannabis plays that invested in the early stages should have premium positions in the market. The Company mainly directs its investments to companies with high-margin product offerings, which include edibles, concentrates, oils, vapes, and CBD-based products.
LGC CAPITAL LTD. TSXV:LG
(Currency is CAD$ & estimates are attributable, unless noted otherwise)Last Price $0.095
Target Price$0.20
Potential Return111%
Net Asset Value Per Share $0.21
52 Week Low / High$0.08 / $0.25
Average Daily Volume (30-Day)806K
| CAPITALIZATION | Basic | Diluted |
|---|---|---|
| Shares Outstanding (M) | 495.0 | 600.9 |
| Market Capitalization ($M) | $47.0 | |
| Enterprise Value ($M) | $33.8 | |
| Cash Balance ($M) | $15.5 | |
| Total Debt ($M) | $2.3 |
| LGC CAPITAL OPERATIONS | 2019E | 2020E | 2021E |
|---|---|---|---|
| Flower Produced (kg) - 100% | 10,700 | 30,800 | 51,800 |
| Revenue ($M) | $15.6 | $37.8 | $65.8 |
| Cash Costs ($ per gram) | $0.96 | $1.00 | $0.96 |
| AICC ($ per gram) | $2.31 | $2.10 | $1.66 |
| EBITDA ($M) | -$0.7 | $7.3 | $23.6 |
| FCF ($M) | -$14.1 | -$15.1 | $0.1 |
| Total CAPEX ($M) | $12.7 | $19.0 | $14.6 |
| CFPS | $0.00 | $0.01 | $0.03 |
| Cash At Year End ($M) | $6.1 | $3.0 | $2.6 |
| Debt At Year End ($M) | $2.5 | $6.0 | $6.0 |
| Relative Valuation | P/NAV | EV/EBITDA | |
|---|---|---|---|
| 2019E | 2020E | ||
| LGC Capital Ltd | 0.5x | nm | 4.6x |
| Cannabis Holdings Companies | n/a | 5.4x | 6.4x |
| Gold and Oil Royalty Companies | 1.4x | 8.5x | 8.0x |
| MAJOR SHAREHOLDERS |
|---|
| Management & Insiders (21.3%) | DISCLOSURE CODE: |
| Disclosure: None (See back page for further details) |
ATTRIBUTABLE REVENUE & EBITDA FORECAST
INVESTMENT THESIS
- A compelling international portfolio of assets with brands and distribution across four continents. LGC Capital is focused on identifying and developing successful consumer brands. In terms of a cultivation footprint, LGC has access to more than 450,000 sq. ft. with plans to increase this to 2.1M sq. ft. on a fully consolidated basis by 2020E. For reference, Canopy Growth Corp. (TSX:WEED, $60.81 | N/R), the largest cannabis company by market cap at $21B, has ~1.3M sq. ft. under construction.
- LGC has invested $29M to date. These investments range from modest ownership of vertically-integrated operators in mature medical markets to cultivation/sales licenses in geographies ripe with potential for significant recreational upside. To date, the Company has made investments across five countries.
Valuation
- We are initiating coverage of LGC Capital with a BUY rating and a target price of $0.20/share. We utilize a 50/50 blended net asset value (NAV) and EV/EBITDA methodology for our valuation. For NAV, we use a 10-year DCF, discounted one-year out for $0.21/share. For EV/EBITDA, we utilized a conservative 4.0x multiple, consistent with cannabis holdings companies and intermediate cannabis producers, applied to our 2021E EBITDA estimate, equating to $0.18/share. We utilize a fully-financed share count, which presumes an $8.0M raise at $0.10 and $6.0M in debt at a 10% interest rate.
- Trades at a discount to peers. LGC currently trades at 4.6x our 2020E EBITDA estimates of $23.6M, a discount to cannabis holdings companies and gold and oil royalty companies, which trade at an average of 6.4x and 8.0x, respectively. We believe this gap should close as LGC begins to make material cash flow.
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