Aleafia Health Q3 Should Be a Model for Canadian Cultivators

Aleafia Health Inc. (TSX:ALEF), one of the Canadian marijuana stocks, reported Q3/19 financial results before markets opened on November 12, 2019

SmallCapPower | November 13, 2019: Aleafia Health Inc. (TSX:ALEF) (OTC:ALEAF), one of the Canadian cannabis stocks, reported third-quarter 2019 financial results on November 12, 2019, before markets opened. Results were highlighted by net income of $1.9M on revenue of $5.0M, and an adjusted EBITDA loss of $2.5M.

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Figure 1: Aleafia Health Financial Highlights

Source: Company Reports, Ubika

Net cannabis revenue increased 58% quarter over quarter. Net cannabis revenue came in at $3.8M for the quarter (was $2.4M during Q2). Medical cannabis sales increased 43% to $1.5M, while adult-use cannabis revenue rose 53% to $2.2M. Average selling price per gram was $15.11 for medical, $6.40 for adult-use recreational, and $6.00 for bulk wholesale. Registered medical patients increased by 48% to 10,298 (was 6,959 during Q2). The significant increase in medical patients (48% in Q3 vs. 27% in Q2) were likely former CannTrust (TSX:TRST) patients transferring their prescriptions.

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Outdoor harvest could bring in $25M to $30M in revenue. Aleafia Health harvested 10,300 kg of cannabis from its 26-acre property in Port Perry, at an average cost of $80/kg, the lowest-cost cannabis produced in Canada. Aleafia CEO Geoff Benic mentioned on the earnings call that the entire outdoor harvest would be earmarked for extraction. Additionally, Mr. Benic mentioned that the cannabinoid content was only slightly below the cannabinoid content of cannabis grown indoors. Aleafia’s adult-use brand SYMBOL, available in the Ontario Cannabis Store (OCS), sells the following strains: Daily Rind, Dreamweaver, and Solar Power, which have THC content of 12% – 17%, 10% – 16%, and 15% – 24%, respectively. Using an average cannabinoid content of 10%, Aleafia’s outdoor harvest could yield 1,030 kg of extracted cannabis oil. At an average wholesale price of 25K to 30K per kg of cannabis oil, Aleafia’s outdoor harvest would be worth between ~$25M to ~$30M. Aleafia Health expects to expand its outdoor cultivation to 86 acres next summer and is adding extraction equipment at its Paris facility to meet extraction demand.

Strong cash position leading into F2020. As of September 30, 2019, ALEF had $57M in cash and cash equivalents and ~83M in working capital. During the earnings call, Aleafia Health CFO Benjamin Ferdinand mentioned that all Aleafia’s facilities are now complete and capex going forward should be minimal. With a cash burn rate of about ~15M per quarter, Aleafia is well capitalized and is in a strong position to become cash-flow positive in the coming quarters. Additionally, the Company has ~13M in cash and ~7M shares on deposit with Aphria, for a 175,000 kg, five-year supply agreement. On October 8, 2019, Aleafia announced that it will seek to terminate the supply agreement with Aphria for failure to meet obligations under the terms of the agreement. The case is currently in arbitration, but this could add an additional ~$13M to Aleafia’s treasury.

Figure 2: Aleafia Comps Table

Source: Ubika, Capital IQ

Trades at a discount compared with peers. Aleafia Health stock trades at a 4.5x 2021E EV/EBITDA, a discount to Canadian majors, which trade at a consensus average of 16.6x. We believe that this valuation gap should close overtime as the Company books revenues from its outdoor grow and upon successful ramp-up of the Niagara Greenhouse, Port Perry facility, and the Paris extraction & processing centre.

Key takeaways. Overall, it was a positive quarter for Aleafia. Net revenue increased by 29% while SG&A decreased by 34%, adding validity to management’s strategy. Investors should expect significant increases in revenue and gross margins going into F2020, as Aleafia’s high-margin extracted products begin to roll-out with Cannabis 2.0. Aleafia Health is in a strong liquidity position with a solid balance sheet and a current ratio of 9.0x. For Q4/19, analysts are expecting ALEF to bring in revenue of ~$8M, as this will be its last quarter without significant revenues from Cannabis 2.0. Aleafia is expected to report Q4/19 financial results on or about February 28, 2020.

Shares of Aleafia Health ended Tuesday’s trading session 12% lower at C$0.81. Aleafia Health stock trades at a market cap of C$225 million.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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