Green Organic Dutchman Investors Could Be Rewarded Going into 2020

The Green Organic Dutchman Holdings Ltd.’s (TSX:TGOD) advanced technology is expected to deliver peer-leading operational expenditures

John Brooker | SmallCapPower | June 14, 2019: The Green Organic Dutchman Holdings Ltd. (TSX:TGOD) is a premium global organic cannabis company. It has operations focused on medical cannabis markets in Canada, Europe, the Caribbean, and Latin America, as well as the Canadian adult-use market. It produces organic cannabis products, including organic dried cannabis, cannabis oils & edibles, fresh cannabis, and seeds for medical applications. The Company grows high-quality, certified organic cannabis with sustainable, all-natural principles. TGOD puts all its products through laboratory tests to ensure patients have access to a premium, consistent, and safe product. Green Organic Dutchman also has a fully-funded planned capacity of 219,000 kgs and is building 1,643,600 square feet of cultivation and processing facilities in Canada, Jamaica, and Denmark.

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Source: Capital IQ, Company Reports

Valuation

Trades at a discount compared with its peers. TGOD trades at a 2.5x 2020E EV/Revenue and 9.1x 2020E, EV/EBITDA multiples, compared with Canadian majors, which trade at a consensus average of 9.3x and 34.0x multiples, respectively. Additionally, Green Organic Dutchman has one of the lowest EV/fully funded production capacities at 3.5x, compared with 18.1x the average of its peer group. We believe that this valuation gap should close once the Company ramps up production going into 2020.

Domestic Operational Overview

TGOD’s hybrid and low-cost facilities use highly-efficient LED and high-pressure sodium (HPS) lighting, along with advanced humidity and temperature controls relative to the greenhouses of its competitors. With advanced technology, energy efficiency, and natural light, and high levels of automation, Green Organic Dutchman expects its facilities to deliver lower operational expenditure relative to its peers.

TGOD’s Hamilton Facility

Source: Company Reports

Hamilton Facility: Located in Hamilton, Ontario, TGOD’s 20,000 square foot facility expects to have a capacity of 14,000 kg by Q3 2019 and is currently undergoing the EU GMP certification process in order to enable European exports. Green Organic Dutchman has plans for this facility to reach 166,000 square feet with an expected production capacity of 17,500kgs before the end of 2019. On May 14, TGOD announced that it has obtained approval from Health Canada to expand operations of its production facility in Hamilton.

TGOD’s Valleyfeild Facility

Source: Company Reports

Valleyfield Facility: Located in Quebec, TGOD’s Valleyfield Facility is projected to be the world’s largest organic cannabis facility. At its completion, the facility will be 1,310,000 square feet and have an expected production capacity of 185,000 kgs. Like the Hamilton facility, this facility is also undergoing the process of attaining an EU GMP certification to enable European exports.

Investment Thesis

TGOD’s organic products differentiates it amongst competitors. Growing certified organic cannabis involves organic soil, natural sunlight, purified water, and organically-based additives to ensure premium quality. As a result, organic cannabis producers can demand a higher price for their product. CanvasRX, Canada’s top medical cannabis educational site, estimates that the industry average selling price per gram is approximately $9.20, while Whistler Medical estimates that the industry average selling price per organic gram is approximately $12.22.

This represents a premium of 32.8%. Despite the higher price point, demand for these premium cannabis products is still high. In fact, Hill+Knowlton Strategies estimates that organic cannabis is preferred by 61% of medicinal patients and 50% of recreational cannabis consumers. The existence of a large and underappreciated market opportunity for premium consumers, along with TGOD’s capability of producing top-quality organic cannabis at a large capacity, gives Green Organic Dutchman Holdings a competitive advantage.

Strong domestic distribution. Although demand currently exceeds supply in the Canadian cannabis industry, this will not always be the case. A key factor to long-term success, when companies will have to compete over customers, will be distribution. TGOD is currently building a strong distribution network to give them an edge over their competitors.

A key aspect of TGOD’s domestic distribution advantage is its supply partnership with Velvet Management Inc for sales and distribution to provincial liquor and cannabis boards across Canada. Velvet is owned by the largest wine distributor in Canada, Philippe Dandurand Wines. Its presence is immense, as it boasts over $625 Million of retail sales across 1,600 locations throughout Canada. This partnership provides Green Organic Dutchman with a channel to every provincial liquor and cannabis board across Canada. Already, TGOD has secured supply agreements with the Ontario Cannabis Retail Corporation, the BC Liquor Distribution Branch, and Alberta Gaming, Liquor & Cannabis.

International Expansion Plans

As regulation around cannabis become more and more relaxed outside of Canada, Canadian cannabis companies will look to take advantage of foreign markets. The estimated size of the global medical cannabis market ranges anywhere from $30B to $150B. This is a huge market opportunity, regardless of which estimate is used. Another reason the international market is attractive is that the prices for medical cannabis can be anywhere from 25%-50% higher than what is being realized in Canada. For example, the landed price for Germany is approximately $10-$12/gram, compared with $7-8/gram in Canada. It is important to note that these are non-organic prices, and with organically-grown cannabis TGOD could charge an additional premium of ~33%.

TGOD’s purchase of 49.2% of Epican gives the Company a logistical advantage within Jamaica. The Company was granted Jamaica’s first cultivation licence and is now the first fully-integrated company to obtain two retail licenses from Jamaica’s Cannabis Licensing Authority. Epican has cultivation sites within Jamaica, featuring a current capacity of 1,300 kg, and an expected full capacity of 14,000 kg. Epican currently has two dispensaries open and is expecting to open four additional planned dispensaries. This partnership also benefits TGOD, as it creates a platform to export TGOD-branded, Jamaican-grown cannabis products to select international medical jurisdictions.

In Mexico, TGOD has partnered with LLACA Grupo Impresarial, owning 50% of the Company. LLACA has developed proprietary distribution capabilities and has access to premier distributors with commercialized pharmaceutical and over-the-counter products, providing access to 4,500 pharmacies and 3,100 supermarkets throughout Mexico. This partnership is expected to result in strategic distribution of TGOD-branded organic cannabis and hemp-derived medical products throughout Mexico.

TGOD has also taken advantage of the European Hemp Business, acquiring HemPoland in mid 2018. HemPoland is a leading European manufacturer and marketer of premium organic CBD oils and was the first company in Poland to obtain a state license allowing the company to grow hemp and manufacture CBD oil products. This strategic acquisition provides access to HemPoland’s vast distribution network, premium Cannabigold brand, and state-of-the-art hemp oil extraction technologies. The acquisition also grants Green Organic Dutchman a European gateway and distribution channel to more than 750 million people and sales in over 700 locations across 13 countries. This investment is already paying off for TGOD, as HemPoland’s sales have been growing strongly since the acquisition.

TGOD has also partnered with multi-billion-dollar ingredient giant Symrise and a management team of seasoned beverage experts to create Califormulations LLC, a U.S.-based beverage innovations company. Green Organic Dutchman will leverage the years of experience to expedite the launch of TGOD-branded, organic hemp-based CBD beverages throughout the United States, and globally.

Green Organic Dutchman has two joint ventures within Denmark. The Production JV consists of a first phase 40,600 square foot facility with 2500kg of capacity, while The TGOD Genetics JV aims to develop and patent innovative and commercially-valuable elite cannabis genetics. In our view, TGOD is taking strategic considerations within its international expansion plans and investing in foreign markets that provide them with favourable upside.

Recent News

May 24, 2019: TGOD announced that is has secured a cannabis supply agreement with Alberta Gaming, Liquor & Cannabis, Alberta’s legal, non-medical online cannabis store, further expanding its footprint in Western Canada.

May 14, 2019: TGOD announced its financial and operational results for the quarter ending on March 31, 2019. These results featured revenues of $2.4 Million, a 28% increase over the prior quarter. These results also featured a net loss of $14.1 Million, an improvement by $4 Million compared to the previous quarter.

May 13, 2019: TGOD announced that its subsidiary, HemPoland, has entered into an agreement with Mediakos UG haftungsbeschraenkt to be the exclusive distributor of CannabiGold, its premium hemp CBD brand, for the German pharmacy market.

May 9, 2019: TGOD announced that it has secured a cannabis supply agreement with the BC Liquor Distribution Branch, British Columbia’s public retailer of non-medical cannabis.

May 8, 2019: TGOD announced that it has made a strategic investment into the U.S. beverage space as a founding investor and strategic partner in the newly-formed Califormulations LLC. Califormulations will operate out of Columbus, serving global branded companies with beverage commercialization support.

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