Equity Research Healthcare – Cannabis | July 29, 2019
Patrick Smith | Analyst | Ubika Research Patrick@UbikaResearch.com | (647) 444-5506
Christopher, Bednarz MBA | Associate | Chris.B@UbikaResearch.com | (416) 558-5548
SmallCapPower | July 29, 2019: Protecting shareholders to ensure full value is achieved in the long-term. On July 24, 2019, Nextleaf Solutions Ltd. (CSE:OILS) announced the adoption of a shareholder rights plan, which protects shareholders in a hostile take-over bid. This is also known as a poison pill. The plan grants one right for no consideration for each common share, applicable to shareholders of record, as of July 23, 2019.
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Under the plan, shareholders have the right to double their share holdings at half the market price should an attempt to acquire 20% or more of Nextleaf’s common stock take place through a hostile takeover bid. Under the terms of the poison pill, for a takeover to be successful, a bid must be made to all shareholders of the Company and must be open for a minimum of 105 days. If more than 50% of the shares held by independent shareholders (shareholders other than the acquiring person or related persons) have been tendered and not withdrawn, the bidder may acquirer the shares, but must make a public announcement of the acquisition and extend the bid for an additional 10 days to allow other shareholders to tender their shares to the bid. The term of the poison pill is three years and is subject to re-approval by shareholders of Nextleaf at its 2022 Annual Meeting.
A shareholder rights plan is a tool employed by an issuer to protect shareholders in a hostile takeover attempt. During hostile takeovers, the acquiring company or individual(s) may employ abusive takeover tactics, such as buying shares aggressively on the open market. For example, in November 2012, Netflix adopted a poison pill to prevent activist investor Carl Icahn from launching a takeover attempt. After it was disclosed that Icahn owned 9.98% of Netflix’s stock, Netflix’s poison pill successfully thwarted Icahn from gaining substantial influence on the Board of Directors. In June 2015, Icahn moved on and sold his position. In situations like this, a shareholder rights plan can be used to force an activist into negotiation. Nextleaf’s portfolio of 27 issued and pending patents, including patents on various methods of industrial scale extraction, purification and refinement of cannabinoids and concentrate product formulations, could be a target for a large-cap cannabis, pharmaceutical, or CPG player. In short, the shareholder rights plan helps to ensure shareholder value is maximized should a large player attempt a takeover. We highlight that once Nextleaf’s facility receives a Standard Processing License from Health Canada, the Company is likely to gain significant exposure in the Canadian market.
NEXTLEAF SOLUTIONS LTD. CSE:OILS
(Currency is CAD$, unless noted otherwise) (Fiscal year-end is as of Sept. 30)Last Price $0.42
Target Price$1.65
Potential Return293%
Net Asset Value Per Share $2.16
52 Week Low / High$0.30 / $0.83
Average Daily Volume (30-Day)165K
| CAPITALIZATION | Basic | Diluted |
|---|---|---|
| Shares Outstanding (M) | 107.8 | 147.3 |
| Market Capitalization ($M) | $45.3 | |
| Enterprise Value ($M) | $41.7 | |
| Cash Balance ($M) | $3.6 | |
| Total Debt ($M) | $0.0 |
| OILS OPERATIONS | F2020E | F2021E | F2022E |
|---|---|---|---|
| Biomass Processing Volume (kg) | 9,130 | 25,800 | 54,300 |
| Crude Produced (kg) | 790 | 1,890 | 3,420 |
| Distillate Produced (kg) | 300 | 1,080 | 2,660 |
| Total Revenue ($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 | $0.0 |
| Relative Valuation | EV/EBITDA | EV/SALES | ||
|---|---|---|---|---|
| 2020E | 2021E | 2020E | 2021E | |
| Nextleaf Solutions | 5.4x | 0.8x | 0.8x | 0.3x |
| Extraction Companies | 18.2x | 7.5x | 5.5x | 2.7x |
| CAN-Based Major Cultivators | 31.6x | 14.0x | 7.8x | 4.6x |
| US-Based Operations | 8.5x | 5.6x | 2.6x | 1.8x |
| MAJOR SHAREHOLDERS |
|---|
| Management and Insiders (17%) |
| Disclosure: 1, 3 (See back page for further details) |
REVENUE & EBITDA FORECAST ($M)
Nextleaf 3-Month Share Price Performance
VALUATION
We believe Nextleaf’s facility could receive a Standard Processing License from Health Canada in less than two months. On July 8, 2019, Nextleaf announced that it had submitted to Health Canada its Affirmation of Readiness and Video Evidence Package. According to management, Health Canada has indicated a service standard for response to parties that have submitted an evidence package of 60 days. As a result, Health Canada could make a decision as early as September 6, 2019. We highlight there have been several licenses granted of late – PharmHouse, Tricho-Med, and The Flowr Group. Although we do not know when these companies submitted their respective evidence packages, this does indicate that Health Canada remains active in its licensing efforts. In terms of timing, we continue to expect the facility to be licensed by Q4/19, however, there is a reasonable chance that this may occur earlier.
We are maintaining our BUY rating and our target price of $1.65/share. The adoption of a shareholder rights plan is an important defence against potential hostile bidders, to help ensure the Company’s full fundamental value is realized. We believe Nextleaf is in a prime position to take advantage of what should be a thriving, lucrative extraction market in Canada in 2020E and beyond. In terms of estimates, we have made slight updates to account for the last reported fiscal quarter (ending March 31, 2019). 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.
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