Equity Research Healthcare – Cannabis
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. is a Canadian extraction technology company that has developed a portfolio of issued and pending patents pertaining to the Company’s unique, industrial-scale process of producing purified cannabinoid distillate, a tasteless, odourless cannabis concentrate best suited for infusing premium value-added products. As of March 14, the Company closed its reverse takeover (RTO) financing of $5.0M, which will be used to complete the build out of its 6,540 sq. ft. processing facility located in the Greater Vancouver Area, B.C. Based on one shift per day, OILS expects the Phase One buildout of its facility to have an estimated annual processing capacity of 100,000 kg of dried cannabis biomass. All parts and components of the ethanol-based system are designed to run 24 hours a day, 7 days a week. Thus, the Company could theoretically increase output by more than double by operating around the clock. Nextleaf expects its purpose-built facility to be completed and licensed by Q3/19. The Company currently has an issued U.S. patent on the entire end-to-end process (from biomass preparation to molecular distillation), and to our knowledge, is currently the only publicly-traded cannabis company to have a cannabis-specific extraction patent granted by the U.S. Patent Agency.
NEXTLEAF SOLUTIONS LTD. CSE:OILS
(Currency is C$, unless noted otherwise)
Last Price (April 1, 2019) $0.34
RatingN/R
Target PriceN/R
Average Daily Volume 1.8M
Company HeadquartersVancouver, BC, Canad
Company Websitewww.nextleafsolutions.com
MANAGEMENT TEAM
Paul Pedersen CEO, Co-Founder, and Director
Charles Ackerman CFO, Director
Ryan Ko CTO, Co-Founder
MAJOR SHAREHOLDERS
Management and Insiders (17%), 5 Largest Shareholders (30%), Legion (4%)
| Capitalization | Basic | Diluted |
|---|---|---|
| Shares Outstanding (M) | 96.6 | 125.6 |
| Market Capitalization (C$M) | $32.9 | |
| Enterprise Value ($M) | $27.9 | |
| Cash Balance ($M) | $5.0 | |
| Total Debt ($M) | $0.0 | |
| Relative Valuation | EV/Revenue 2020E | EV/EBITDA 2020E |
| Nextleaf Solutions | 0.3x | 1.2x |
| Extraction Companies | 1.7x | 5.4x |
| CAN-Based Major Cultivators | 12.7x | 67.4x |
| US-Based Operations | 4.1x | 14.1x |
Nextleaf Solutions: Share-Price Performance
INVESTMENT THESIS
Nextleaf’s focus on ethanol allows the Company to effectively process large amounts of biomass, leading to lower CAPEX and operating costs, and higher efficiencies than its direct competitors. The difference in scaling between using ethanol and supercritical CO2 for primary cannabis extraction appears very significant. According to management, with Nextleaf’s patented ethanol technology, the Company estimates a processing capacity of ~60 kg/hour, compared to ~2-5 kg/hour using supercritical CO2 extraction technology that utilizes a similarly-sized system with a much higher CAPEX. As legal cannabis production in Canada continues to increase, cost-efficient, scalable, cannabis extraction and processing technology is likely going to be required to support a rapidly-growing demand for valueadded cannabis products, such as vape pens, edibles, beverages, and topicals.
VALUATION
Undervalued compared with peers. Based on our preliminary revenue estimates of $80.4M for 2020E, Nextleaf trades at 0.3x sales, compared with other cannabis extractors, Canadian majors, and U.S.- based operations, which trade at a consensus average of 1.7x, 12.7x, and 4.1x, respectively. We note that in our initial analysis, we only assumed one shift per day (Nextleaf can do more than two) and modelled ~17% utilization of Nextleaf’s Phase 1 (100,000 kg/year) in 2019E. As a result, we believe there is plenty of room to exceed our estimates. If we increase utilization to 50%, we believe Nextleaf could reach revenue of $113.5M in 2021E.
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