Hemp products offer Mettrum Health a potential differentiator among its competitors
SmallCapPower | November 25, 2016: Being the third company to receive a sales license under the MMPR system back in 2014, has provided Mettrum Health Inc. (CVE:MT) with a sort of ‘first mover’ advantage when compared to others entering the space. Although there is still room for growth within the producing market as there is expected to be a supply shortage when recreational marijuana is legalized in 2017, once that market is developed, companies will need to find ways to continue to expand. As one of the only major medical marijuana producers that has invested in the creation of an assortment of hemp-based consumables, they will provide Mettrum that opportunity as their brand will be able to reach a larger audience, leading to a greater earnings potential.
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Overview of Mettrum
Mettrum currently owns two facilities, one in Bowmanville and the other in Creemore that produce medical marijuana for patients registered with Health Canada. Although it does have a third facility, Mettrum has recently entered into an agreement to sell it. Between the two owned facilities, there is a production capacity of 6,000kg per year, however once the build out at its Bowmanville facility is completed by end of Fiscal 2017 (March 2017), Mettrum will have the capacity to produce 12,000 kg per year.
Figure 1: Mettrum Originals Products
In addition to its medical marijuana production facilities, Mettrum also holds a lease to a facility in Barrie where it produces hemp-based consumables. These consumables range from health foods to a natural wood finishing oil, and all are sold under the brand name “Mettrum Originals.” This product line, developed through research that began over 20 years ago, is produced from hemp cultivated from the non-psychoactive (less than 1% THC) varieties of the cannabis plant.
Mettrum’s Financial Position
With the recent sale of its Bennet Road North facility and license to Cannabis Care Canada Inc. (CCC) for $7mm, it’s a step towards consolidated operations at its facility in Bowmanville. Although the transaction isn’t expected to be completed until January, 2017, the agreement favours Mettrum’s operations substantially. With a three-year sales agreement worth an estimated $40mm, by divesting itself of an asset that could only produce 500kg of marijuana, Mettrum will decrease its liabilities and increase the health of its balance sheet, as CCC assumes all obligations related to the facility. This will also reduce interest payments, providing more available cash for further development of its core assets.
As of its recent financial statements for Q2 of 2017, which ended September 30th, 2016, Mettrum had a healthy cash balance of $24.2mm. With a small amount of maturing debt within the year, having a quick ratio of 7.1 and at its current cash burn of approximately $8.4mm per quarter over the last six quarters, Mettrum should be able operate without the need for outside financing for at least the next three quarters. This assumption also includes the $7mm that will be added to the balance sheet once the transaction for Bennet Road North is completed.
The only potential threat to Mettrum’s financial health right now, besides the regular business factors surrounding its operations, is the financial covenants that the Company has to come into compliance with starting March 31st, 2017, for its loan facilities. As theses covenants have not been disclosed as part of any news release or note to a financial statement we will not know whether Mettrum is in compliance until March 31st, 2017.
Avenues for Growth
With the impending legalization of recreational marijuana and the approximately $8.7 billion market that the sale of marijuana will create, Mettrum is positioning itself for brand recognition. By the end of fiscal 2017 (March 2017), Mettrum is planning to release its product line for recreational use, which will certainly drive excitement behind the stock as the market reacts and pushes its value higher.
There is also the need to point out that there is a large market for hemp products that currently exists on a global scale. The Mettrum Originals Brand may have only accounted for approximately 3% of sales for the first half of its fiscal 2017, but the brand has the potential to capitalize on the growing industry.
The market for hemp and its related products is also booming. According to numbers released by the Hemp Industries Association (HIA), the U.S. generated USD$573mm in hemp product sales in 2015 of which, USD$283mm was foods, supplements and body care products. A large majority of the product that fueled those sales came from Canada, and with sales expected to hit $1.8billion in the U.S. alone by 2020, offers a large opportunity for Mettrum’s products. The CEO of Canadian-based Manitoba Harvest, a solely hemp-foods company, even said in an interview back in 2015, that he expected sales for his company to reach CAD$100mm by the end of 2015.
Figure 2: US Imports of Raw Hemp Products
Why Hemp?
Hemp holds many characteristics that society is placing more importance and this is helping to drive growth. Hemp is extremely renewable, only taking 70 to 140 days to produce from seed to harvest, and is easily grown organically as it has natural herbicide and insecticide properties. The seeds are also considered to hold a perfect balance of Omega 6 and 3 fatty acids with a ratio of about 4 to 1, which is Health Canada’s recommended ratio. Hemp can also be used for everything from food to insulation and as an alternative to softwood for pulp and paper, which opens up the possibility of significantly reducing deforestation and helping to curb climate change.
Although not a large portion of their business currently, hemp products offer Mettrum a potential differentiator among its competitors, and a way to develop brand loyalty now with those that won’t smoke marijuana until it is legalized (approximately 13% of the Canadian population according to Forum Research). The product line could also aid growth through international expansion as Mettrum can currently export its hemp-based products to more markets than its medical marijuana, opening up the opportunity to creating brand awareness in foreign markets, ahead of legalization events for marijuana.
Final Thoughts
As projected revenues from brokerage houses predict sales for Mettrum at $58.9mm for its fiscal 2018, it puts Mettrum at an Enterprise Value (EV) to Forward Revenue of 3.9x, which is quite high when you compare to tech stocks that tend to exhibit a 3.0x EV/ forward revenue. However, when compared to its peers in the medical marijuana production space in Canada, it is on the lower end and below its largest competitors Canopy Growth Corp. (15.1x), Aphria Inc. (9.3x), and OrganiGram Holdings (7.8x). With the ability to expand outside of the medical marijuana sector, and into the fast growing hemp-based product industry, there is an opportunity for Mettrum to create a larger, more holistic brand name that extends beyond producing marijuana, and become a leader in natural health and wellness products.
