Ventura Cannabis and Wellness Corp CVHIF

Mackie: Buy rating and $0.90 target price for Convalo Health

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According to Mackie Research:

https://personal.crocodoc.com/stUFhX4

INVESTMENT HIGHLIGHTS

CONVALO HEALTH INTERNATIONAL CORP.

Growing Stronger Thanks to Parity

- We are initiating coverage of Convalo Health International Corp. (CXV-TSXV) with a SPECULATIVE BUY recommendation and a 12-month target of $0.90 per share. All figures are in CDN$ unless otherwise noted.

- The Company: Convalo operates substance abuse treatment facilities in the United States, including detoxification, residential and outpatient services in Hollywood and Central Los Angeles. It recently reported annualized revenue and EBITDA run rates of $23.0 million and $5.5 million, respectively. Through acquisitions and organic growth, we expect CXV to expand in West Los Angeles, as well as other major U.S. cities.

- Investment Thesis – Growing Stronger Thanks to Parity: There are approximately 15,500 substance abuse treatment centers in the United States, and over ¾ of them are operating at over 80% of capacity. Over 1.2 million Americans receive substance abuse treatment at a specialized facility, while approximately 22.2 million Americans are classified with substance dependence or abuse. Amongst those seeking treatment, affordability is the chief impediment to obtaining it. Recent legislation (the Parity Act and the Affordable Care Act) effectively forces an expansion of coverage for mental health and substance abuse disorder (MH/SUD) benefits. Convalo’s management and board have signficant U.S. healthcare M&A experience, having grown Patient Home Monitoring (PHM-TSXV, $2.50 target) by 20x to a $450 million market capitalization in less than two years. Following recent acquisitions, Convalo still has $21.5 million in cash available for additional M&A. The exercise of warrants at $0.50 per share should generate an additional $21.6 million in cash in calendar Q4/15. In short, the industry fundamentals are attractive, and CXV has the experience and the balance sheet to expand rapidly.

- Valuation: We value CXV based on the average of 14x EV/EBITDA and 16x operating cash flow, applied to our F2016 estimates. These multiples represent a 20% discount to the closest comparables.

- Potential Catalysts: These include M&A activity, improved financial results, and an eventual U.S. exchange-listing.