Equity Research Healthcare – Cannabis | September 05, 2019
Patrick Smith | Analyst | Ubika Research Patrick@UbikaResearch.com | (647) 444-5506
Christopher, Bednarz MBA | Associate | Chris.B@UbikaResearch.com | (416) 558-5548
SmallCapPower | September 5, 2019: Robust patent portfolio covering all aspects of the extraction and refinement process. On September 3, 2019, Nextleaf Solutions Ltd. (CSE:OILS) announced that it had been granted a patent for the Company’s proprietary technology for post-extraction processing of THC/CBD. The patent extends Nextleaf’s existing patent portfolio to include a method relating to the removal of unwanted fats and lipids from crude cannabis oil. The new methodology speeds up the process of removing excess fats and waxes from crude cannabis extract, which enables Nextleaf to achieve more efficient throughput rates. Recall that using an Ethanol-based system, Nextleaf can achieve a throughput of 500 kg biomass/day. This compares favourably to C02 based systems, which can achieve ~40 kg/day per machine (based on one q45 Vitalis). Of note, this refinement and distillation process can also be applied to other extraction methods, such as CO2 or hydrocarbon-based extraction.
Distillation and refinement are the final steps of the extraction process. The main different between primary extraction (crude cannabis oil) and secondary extraction (isolation of cannabis isolate/distillate) is purity. In primary extraction, there are high concentrations of cannabinoids and terpenes, however, there is no isolation of specific cannabinoids. Through isolation (secondary extraction), concentration and purity can be increased further. Purity is especially important for products that are inhaled. Issues with products such as vape pens arise when distillate is not properly refined, and unwanted waxes or lipids are left in the product and inhaled, which some believe could lead to tar in the lungs. Nextleaf’s new patent helps to ensure between a ~85% – 95% pure THC/CBD isolate/distillate with no remaining waxes or lipids. In our view, Nextleaf’s distillation and refinement process should differentiate OILS products from its competitors, due to the efficiency and scalability of the process, leading to more rapid revenue growth.
Health Canada Processing and Sales License imminent. Recall, on July 8, 2019, Nextleaf submitted its Affirmation of Readiness and Video Evidence Package to Health Canada. Health Canada has indicated to management that its expects to respond to operators within 60 days of receiving the completed Evidence Package. Health Canada typically announces new cannabis licenses on Fridays at 5pm. Based on this timing, we believe that the Company could receive its processing and sales license as early as Friday, September 6, 2019.
Undervalued to peers. The addition of the new patent further diversifies Nextleaf’s patent portfolio, which allows the Company to provide a wider range of processing and extraction services in the future. Our revenue and EBITDA estimates for F2020E and beyond remain the same. OILS trades at 0.8x and 5.4x our F2020E estimates, a discount to extraction peers, which trade at 5.5x and 18.2x, respectively.
NEXTLEAF SOLUTIONS LTD. CSE:OILS
(Currency is CAD$, unless noted otherwise) (Fiscal year-end is as of Sept. 30)Last Price $0.55
Target Price$1.65
Potential Return200%
Net Asset Value Per Share $2.16
52 Week Low / High$0.30 / $0.83
Average Daily Volume (30-Day)384K
| CAPITALIZATION | Basic | Diluted |
|---|---|---|
| Shares Outstanding (M) | 107.8 | 147.3 |
| Market Capitalization ($M) | $59.3 | |
| Enterprise Value ($M) | $55.7 | |
| Last Reported Cash ($M) | $3.6 | |
| Last Reported Debt Balance ($M) | $0.0 |
| OILS OPERATIONS | f2020E | f2021E | f2022E |
|---|---|---|---|
| Biomass Processing Volume (kg) | 9,130 | 25,800 | 54,300 |
| Crude Produced (kg) | 790 | 1,890 | 3,420 |
| Distillate Produced (kg) | 300 | 1,890 | 2,660 |
| Total Revenue ($M) | $49.2 | $125.2 | $241.8 |
| EBITDA ($M) | $7.7 | $54.6 | $142.6 |
| FCF ($M) | $0.4 | $33.4 | $91.0 |
| Total CAPEX ($M) | $5.5 | $2.0 | $3.0 |
| CFPS | $0.05 | $0.25 | $0.61 |
| EPS | $0.02 | $0.23 | $0.60 |
| Cash At Year End ($M) | $7.9 | $61.4 | $152.4 |
| Debt At Year End ($M) | $0.0 | $0.0 | $0.0 |
| Relative Valuation | EV/EBITDA | EV/SALES | ||
|---|---|---|---|---|
| 2020E | 2021E | 2020E | 2021E | |
| Nextleaf Solutions | 7.2x | 1.0x | 1.1x | 0.4x |
| Extraction Companies | 14.8x | 5.1x | 4.0x | 1.9x |
| CAN-Based Major Cultivators | 22.2x | 15.6x | 5.9x | 3.3x |
| US-Based Operations | 8.9x | 5.0x | 2.5x | 1.6x |
| MAJOR SHAREHOLDERS |
|---|
| Management and Insiders (17%) |
| Disclosure: 1, 3 (See back page for further details) |
REVENUE & EBITDA FORECAST ($M)
Nextleaf 3-Month Share Price Performance
VALUATION
Undervalued to peers. The addition of the new patent further diversifies Nextleaf’s patent portfolio, which allows the Company to provide a wider range of processing and extraction services in the future. Our revenue and EBITDA estimates for F2020E and beyond remain the same. OILS trades at 1.1x and 7.2x our F2020E estimates, a discount to extraction peers, which trade at 4.0x and 14.8x, respectively.
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