Ubika Alpha has initiated coverage of shares of Nextleaf Solutions Ltd. (CSE:OILS) with a BUY rating and a 12-month target of $1.65 per share, implying a rate of return of 146%
SmallCapPower | May 8, 2019: Nextleaf Solutions Ltd. (CSE:OILS) is a Canadian extraction technology company that has developed a portfolio of issued and pending patents pertaining to the Company’s unique industrial-scale process of producing purified cannabinoid distillate, a tasteless, odourless cannabis concentrate best suited for infusing premium value-added products. Based on one shift per day, Nextleaf expects the Phase One buildout of its facility to have an estimated annual processing capacity of 100,000 kg of dried cannabis biomass. All parts and components of the ethanol-based system are designed to eventually run 24 hours a day, 7 days a week. Consequently, the facility could theoretically increase output by more than double by operating around the clock.
Within a one-hour drive of Nextleaf’s processing facility, there is an estimated ~9M sq. ft of licensed and proposed cannabis greenhouse space that is anticipated to yield 108,000 kg of waste trim and 300,000 kg of dried flower per year. In our view, an abundant supply of cannabis biomass provides both a significant opportunity for Nextleaf’s facility to contract out toll processing and white label production. We believe that both small and large cannabis cultivators are most likely going to have to sell their dry cannabis for extraction. This is because the biomass needs to be processed, otherwise, the value of the dry cannabis is quickly depreciated in within 6 to 12 months. The difference in shelf-life is meaningful considering extracted cannabis has a shelf-life of more than three years. Additionally, many small cultivators and hemp farmers lack extraction, purification and processing capacity due to high CAPEX requirements, and likely have no other options other then to contract out extraction as a service (EaaS) to extraction processing companies.
Nextleaf’s patented ethanol extraction method enables its facility to effectively process large amounts of biomass at scale, leading to lower CAPEX and OPEX, and higher efficiencies than its direct competitors. The difference in scaling between using ethanol and supercritical CO2 for primary cannabis extraction appears very significant. As legal cannabis production in Canada continues to increase, cost-efficient, scalable, cannabis extraction and processing technology is likely going to be required to support a rapidly-growing demand for value added cannabis products, such as vape pens, edibles, beverages, and topicals.
Trades at a significant discount to peers. Nextleaf Solutions stock currently trades at 6.8x our 2020E EBITDA estimate, a discount to extraction companies, which trade at an average of 17.7x. We believe this gap should close over time once more “seed-to-sale” Canadian producers continue to miss expectations, and as more eyes turn to extraction plays.