Equity Research Healthcare – Cannabis | May 8, 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: Nextleaf Solutions Ltd. (“Nextleaf”) is a Canadian extraction technology company that has developed a portfolio of issued and pending patents pertaining to the Company’s unique industrialscale process of producing purified cannabinoid distillate, a tasteless, odourless cannabis concentrate best suited for infusing premium value-added products. Based on one shift per day, Nextleaf expects the Phase One buildout of its facility to have an estimated annual processing capacity of 100,000 kg of dried cannabis biomass. All parts and components of the ethanol-based system are designed to eventually run 24 hours a day, 7 days a week. Consequently, the facility could theoretically increase output by more than double by operating around the clock.
NEXTLEAF SOLUTIONS LTD. CSE:OILS
(Currency is CAD$, unless noted otherwise)Last Price $0.67
Target Price$1.65
Potential Return146%
Net Asset Value Per Share $2.06
52 Week Low / High$0.30 / $0.83
Average Daily Volume (30-Day)2,071K
| CAPITALIZATION | Basic | Diluted |
|---|---|---|
| Shares Outstanding (M) | 107.0 | 146.4 |
| Market Capitalization ($M) | $71.7 | |
| Enterprise Value ($M) | $62.7 | |
| Cash Balance ($M) | $9.0 | |
| Total Debt ($M) | $0.0 |
| OILS OPERATIONS | 2019E | 2020E | 2021E |
|---|---|---|---|
| Basic SO at Year End (M) | 113.1 | 123.1 | 145.1 |
| Biomass Processing Volume (kg) | 1,225 | 10,030 | 25,762 |
| Crude Produced (kg) | 167 | 896 | 1,893 |
| Distillate Produced (kg) | 0 | 316 | 1,084 |
| Total Revenue ($M) | $6.1 | $54.2 | $125.2 |
| EBITDA ($M) | -$5.2 | $9.2 | $54.0 |
| FCF ($M) | -$10.5 | $3.4 | $33.3 |
| Total CAPEX ($M) | $5.0 | $3.3 | $1.0 |
| CFPS | -$0.09 | $0.06 | $0.25 |
| EPS | -$0.07 | $0.03 | $0.23 |
| Cash At Year End ($M) | $1.2 | $9.2 | $50.2 |
| Debt At Year End ($M) | $0.0 | $0.0 | $0.0 |
| Relative Valuation | EV/EBITDA | EV/SALES | ||
|---|---|---|---|---|
| 2020E | 2021E | 2020E | 2021E | |
| Nextleaf Solutions | 6.8x | 1.2x | 1.2x | 0.5x |
| Extraction Companies | 17.7x | 8.1x | 4.4x | 2.5x |
| CAN-Based Major Cultivators | 40.2x | 20.1x | 9.8x | 6.0x |
| US-Based Operations | 11.8x | 8.0x | 3.6x | 2.9x |
| MAJOR SHAREHOLDERS |
|---|
| Management and Insiders (17%) |
| Disclosure: 1, 3 (See back page for further details) |
REVENUE & EBITDA FORECAST ($M)
Nextleaf 1-Month Share Price Performance
INVESTMENT THESIS
- Focus on R&D and process development vs. large scale cultivation positions Nextleaf one to two years ahead of the competition. OILS has patented and scaled its extraction, refinement, and distillation process, producing premium and highly concentrated distillate that is odourless, tasteless, and standardized. The Company recently completed the initial build-out of its ~6,500 sq ft. facility and currently has three issued patents, including one issued U.S. patent on the entire end-to-end process (from biomass preparation to molecular distillation).
- Nextleaf’s patented ethanol extraction method(s) enable higher margin biomass processing at scale. The processing capacity with Nextleaf’s patented ethanol technology is estimated to be ~60 kg/ hour, as compared to ~5 kg/hour using a comparably-sized supercritical CO2 extraction system (which requires greater CAPEX for a similarly-sized system).
VALUATION
- We are initiating coverage of Nextleaf Solutions Ltd stock with a BUY rating and a target price of $1.65/share. We utilize a 50/50 blended net asset value (NAV) and EV/EBITDA methodology for our valuation. We utilize a fully-financed share-count, which assumes two raises for $8.0M, as well as all options and warrants that are ITM.
- Trades at a significant discount to peers. OILS currently trades at 6.8x our 2020E EBITDA estimate, a discount to extraction companies, which trade at an average of 17.7x. We believe this gap should close over time once more “seed-to-sale” Canadian producers continue to miss expectations, and as more eyes turn to extraction plays.
POTENTIAL CATALYSTS
- Q3/19 – Complete equipment commissioning in processing facility
- Q3/19 – Secure contract(s) with licensed cultivators
- Q3/19 – Edibles and infused products are legalized for medical and recreational markets by Health Canada
- Q4/19 – Facility to be licensed with the Standard Processing License from Health Canada
- Q1/20 – Facility to be licensed to sell cannabis extracts & oils
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