Alliance One International (AOI:NYSE) is a global contractor, processor, and supplier of tobacco. Their legacy business was the result of two companies merging in 2005 that have over 100 years of experience in the business. Needless to say they have been around a long time and have a global infrastructure in place with their tobacco business.
Recently AOI has decided a new direction to expand beyond the core tobacco business to drive future growth and higher margins, while continuing to improve the core business. The extension into growth segments, namely e-liquids, industrial hemp and cannabis, expands Alliance One's presence in higher margin, fast-growing categories.
E-Liquids
"In 2014 Alliance One saw an opportunity to apply the institutional knowledge of our core business when we started Purilum, LLC as a joint venture between IOTO E-Liquids America LLC and our subsidiary, AOSP Investments, LLC ("AOSPI"). This investment in a new and growing industry line represented the start of our journey into a new future.
"Purilum sets the standard for excellence in flavor development, product quality and compliance – with current good manufacturing practices. Each ingredient used in its e-liquids and flavors is subjected to an extensive review in order to maintain Purilum's position at the forefront of emerging trends. This includes the testing and evaluation of ingredients for flavors and e-liquids. Ingredients include traceability from raw materials to finished product, with batch labeling and quality verification. These industry-leading standards give Purilum the ability to consistently meet the quality and capacity demands of its customers.
"In August 2017, AOSPI made a 40% equity investment in Nicotine River, LLC. This new joint venture has enhanced Purilum's revenue and profitability growth, and Purilum's business is anticipated to further expand as it utilizes its flavor expertise to support product offerings for our new hemp and cannabis businesses.
Industrial Hemp
"In December 2017, our subsidiary Pure-Ag NC, LLC, acquired a 40% equity position in North Carolina-based Criticality, LLC ("Criticality"), with triggers that allow for consolidation up to 50% on or after March 31, 2020. Criticality utilizes the strength of our farmer network to grow industrial hemp in North Carolina under the state's pilot program, which is then used for cannabidiol hemp oil ("CBD") extraction in Criticality's facility in North Carolina. Our five year goal is to become a leader in CBD production and consumer products.
Cannabis
"In January 2018, our wholly owned indirect subsidiary, Canadian Cultivated Products, Ltd. acquired a 75% equity position in Canada's Island Garden Inc. ("CIG") and an 80% stake in Goldleaf Pharm Inc. ("Goldleaf").
"CIG is one of only 35 companies fully licensed to produce and sell medicinal cannabis under the Access to Cannabis for Medical Purposes Regulations in Canada ("ACMPR"), and has a 20,000 square foot indoor growing facility in Charlottetown, Prince Edward Island. Plans are underway to expand the current facilities by an additional 250,000 square feet of greenhouse capacity at their current site. Currently CIG sells products direct to patients and through distributors. In January, CIG signed a Memorandum of Understanding with the Province of Prince Edward Island to be one of three suppliers chosen to supply the recreational cannabis market that is expected to open in the summer 2018.
"Goldleaf is a late-stage applicant under the ACMPR for required licensing to produce and sell medicinal cannabis in Ontario, Canada and is currently completing construction of a 20,000 square foot indoor growing facility with further expansion planned for an additional 710,000 square feet of production over a three year period.
"The combined Canadian cannabis acquisitions are anticipated, subject to regulatory approvals, to have approximately 1 million square feet of production space within a three year period and with the opportunity to become a truly international cannabis company - expanding into international markets as anticipated legalization of medicinal and recreational cannabis use progresses around the world. These acquisitions will integrate and further advance Purilum's flavor expertise as edibles and vaping products become permitted under applicable law.
Public companies in the cannabis space have seen their stock prices grow exponentially as these new markets are a modern day gold rush. The global market size for cannabis could grow to $140 billion worldwide by 2027. The industrial hemp market was already $688 million in 2016 and is expected to grow to over $2 billion by 2020.
Financials
Revenue & Adjusted EBITDA - Fiscal year 2018 has been a strong growth year for the core tobacco business. AOI recently reaffirmed fiscal year 2018 revenues of $1.9-$2.0 billion, which would be approximately 14% growth at the midpoint guidance over the $1.7 billion they recorded for revenues in fiscal year 2017. Additionally, adjusted EBITDA was reaffirmed to be $165-$185 million for fiscal year 2018, which would be approximately 29% growth at the midpoint guidance over the $136 million they recorded in adjusted EBITDA in fiscal year 2017.
Balance Sheet / Liquidity - Like many large, global companies, AOI has historically carried a lot of debt but they have been able to service it. As of December 31, 2017, available credit lines and cash were $543.8 million, comprised of $209.5 million in cash and $334.3 million of credit lines. In the future, AOI stated they may elect to redeem, repay, make open market purchases, retire or cancel indebtedness prior to stated maturity under its various global bank facilities and outstanding public notes, as they may permit. AOI has been looking to buy back anywhere from $25 million to $50 million of debt a year, and will be continuing to do that as they go forward. They have been actively retiring debt. Lastly, in the latest form 10-Q, as customary AOI reported they believe that sources of liquidity versus requirements will be sufficient to fund anticipated needs for the next twelve months.
Share structure - AOI has 9 million shares outstanding. Of that 73 institutions own approximately 61% of the shares and insiders own approximately 9%. The tradable float in my estimation is anywhere from 1.5 million to 2.5 million depending on retail holders.
Just The Beginning Of Cannabis Acquisitions?
AOI believes the future production expansion they have planned will make them a tier 1 player in the Canadian markets. Additionally, they specifically stated their goal is to be an international cannabis company.
"The combined Canadian cannabis acquisitions are anticipated, subject to regulatory approvals, to have approximately 1 million square feet of production space within a three year period and with the opportunity to become a truly international cannabis company - expanding into international markets as anticipated legalization of medicinal and recreational cannabis use progresses around the world. These acquisitions will integrate and further advance Purilum's flavor expertise as edibles and vaping products become permitted under applicable law.
This makes me believe that AOI is actively going to seek additional investments outside Canada to become an international cannabis company.
Risks
Competition could intensify in the cannabis sector if other big tobacco and alcohol companies decide to get involved. However, it appears AOI has first mover advantage as well as the infrastructure already in place with its core tobacco business. Additionally, stocks with floats as low as AOI can have large, rapid moves.
Valuation
As of this January, 2018 article by Seeking Alpha author Cornerstone Investments:
Canopy Growth (OTCPK:TWMJF:OTCPK) has estimated capacity of up to 2.1m square feet. TWMJF has a market capitalization of $4.4 billion.
Aurora Cannabis (OTCQX:ACBFF:OTCQX) has estimated capacity of up to 895,000 square feet. ACBFF has a market capitalization of $4 billion.
Aphria Inc. (OTCQB:APHQF:OTCQB) has estimated available capacity of up to 979,000 square feet. APHQF has a market capitalization of $1.8 billion.
Cronos Group (CRON:NASDAQ) which just listed on the Nasdaq market, has estimated capacity of up to 70,000 square feet in Canada. CRON has a market capitalization of approximately $1.3 billion.
Before the acquisitions into hemp and cannabis, AOI traded at approximately $117 million market capitalization.
The estimated square feet they will have (as well as the potential for more global acquisitions) puts them comparable situations to ACBFF & APHQF.
If AOI were to add $1.8 billion to $4 billion in market capitalization like ACBFF & APHQF, with 9 million shares outstanding that would equate to an AOI share price range of $213 to $457 dollars per share. AOI closed at $21.70 on Friday, March 2, 2018.
Conclusion
There is a scarcity of Nasdaq or NYSE listed companies to invest in the hemp and cannabis growth markets. AOI is now one of the only listed companies as CRON listed last week. AOI has only 9 million shares outstanding and an approximate 1.5-2.5m tradable float. The AOI entry into the e-liquid, hemp, and cannabis markets as well as the potential for future international expansion makes this a unique opportunity for me and that is why I am long.