RE:RE:Raymond James initiated coverage AEAFIA HEALTH INC. (AH-TSX)
Cannabis
Rahul Sarugaser, PhD, MASc | 416.777.6383 | rahul.sarugaser@raymondjames.ca
Michael W. Freeman, MASc (Sr Associate) | 416.777.4943 | michael.freeman@raymondjames.ca
The Ecosystem Company; Preferred Partner for Reimbursed
Cannabis; Low(est) COGS, Big Margins
RECOMMENDATION
Initiating coverage of Aleafia Health Inc. (AH-TSX) with an Outperform rating and a target
price of $1.00/sh. Aleafia is an ON-based licensed producer of cannabis, a provider of direct-to-
consumer cannabis delivery, and the largest provider of cannabis health services in Canada.
Unique to the Canadian cannabis sector, AH is an all-encompassing cannabis ecosystem
comprising: best-in-class cultivation and manufacturing facilities that produce a broad suite of
innovative cannabis products at very low cost (especially its outdoor-grown products); a large
medical cannabis clinic network; and, a unified e-commerce and same-day delivery service
network. This ecosystem creates an enviable captive market for AH, and was instrumental
in securing an exclusive agreement with Unifor—Canada’s largest private sector union—to
support medical cannabis coverage of its 315k member families.
Why We Like AH:
Extremely Low Cost of Goods: AH's outdoor grow operation has repeatedly yielded high
volumes of cannabis at a cultivation cost of ~$0.10/g (7-11x less than the next-best greenhouse
grower), driving super low-COGS cannabis products and robust wholesale revenue.
Uniquely Strong Medical Ecosystem: Nationwide clinics. E-commerce platform. Delivery
service. End-to-end patient assessment to order fulfillment in a single business day.
This ecosystem situates AH as the ideal partner for unions and payors seeking a turnkey
solution for insurance-reimbursed medical cannabis programs. AH's first large union to sign
on: Unifor. Its first large employer: Ford Motor Co. (17k employees). We expect a cascade of
similar groups will follow in these organizations' footsteps.
Expanding Adult-use: AH launched 31 new SKUs since Oct. 2020, which we expect will drive a
material recalibration in its forward revenue: away from wholesale, toward adult-use.
4Q20: A Pivot Point
The past quarter represented a pivot point for AH as it saw ramping revenue from its burgeoning
adult-use cannabis vertical, organic growth of medical cannabis revenue, capped off with
bumper revenue from LP-LP sales. 4Q20 also saw the closing of AH's Unifor deal, which we
expect to begin generating revenue in 2H21.
VALUATION
We value AH based on an average multiple of 2021-2023 EV/Revenue compared to peers. Based on
our revenue estimates, AH trades at a ~40% discount to cannabis peers, implying a valuation
of $1.16/sh. We sanity-check this calculation against a DCF analysis (10% discount, 2% terminal),
which implies a current value of $1.20/sh. We conservatively round these estimates to a target
price of $1.00/sh, which represents a ~59% premium to AH’s current price of $0.63/sh. As such,
we initiate coverage of AH with an Outperform rating. See our Valuation section for more detail.
Aleafia Health: The Cannabis Ecosystem Company
Aleafia Health Inc. (AH-TSX) is an Ontario-based licensed producer (LP) of cannabis for medical and
adult-use markets, a provider of direct-to-consumer cannabis delivery, and the largest provider of
cannabis health services in Canada. AH is a cannabis ecosystem, making it an ideal partner for large
unions and payor groups such as Unifor—Canada’s largest private sector union—with which AH has
secured an exclusive agreement to support the medical cannabis coverage of its 315k members and
their families through collective bargaining agreements. The first major employer to ratify coverage
under the Unifor agreement: Ford and its 17K employees. GM looks to be next.
Alongside its core (and rapidly growing) adult-use and medical cannabis businesses, AH operates a
network of 25 clinics—Canabo Medical Clinics—that serve 75,000+ unique patients across Canada.
Leveraging management’s extensive supply chain and distribution logistics experience—from
companies such as Grocery Gateway, UPS Canada, Walmart, Campbell, and Kraft Heinz—AH offers
Canada’s most robust medical cannabis e-commerce and delivery services. In Sep. 2020, AH launched
its value-add AssureHome Delivery service, which provides Canada’s first same-day, direct-to-door
delivery service exclusively for patients that purchase AH’s range of medical cannabis products: a
delivery offering superior to any of today’s provincial distributors or mail services. Compounding on
AH’s supply chain excellence is its freshly licensed distribution center in Toronto, which now serves as
a logistical hub to boost the reach and efficiency of the company’s last-mile delivery service.
AH operates three manufacturing facilities—two indoor greenhouses totaling 160,000 sq-ft and one
outdoor grow operation of 86 acres—with a collective cultivation capacity of 129,500 kg per year.
AH’s outdoor cultivation site—one of the first established in Canada—provides the company a
significant cost advantage relative to peers: production costs of ~$0.10 per gram of comparable
potency cannabis to indoor-grown (vs. Canada’s lowest greenhouse grow costs at ~$0.80-$1.20/g). The
large volumes of high-quality, low-cost cannabis yielded from AH’s outdoor cultivation site power the
company’s manufacturing pipeline of high-margin Cannabis 2.0 products, or is diverted toward the
equally high-margin wholesale channel. AH’s 35,000 sq-ft Innovation Hub in Paris, ON was built
according to EU-GMP standard and will become AH’s nexus to international markets via export. AH
presently conducts cannabis business in Germany, Australia, and Israel.
Why We Like AH: The Growing Ecosystem, Super-low COGS, Scaling Up Adult-use
Unique to the Canadian cannabis sector, AH has built an all-encompassing cannabis ecosystem. The
ecosystem creates an enviable captive market for AH’s growing range of innovative products. This,
combined with super-low outdoor-grown cannabis $0.10/g cultivation costs, is what caught our
attention first: high rates of repeat purchasing, particularly among AH’s medical cannabis consumer
base (the highest-margin population in Canada).
Then, the ecosystem grew. In Jan. 2021, AH and Unifor—Canada’s largest private sector union,
representing 315,000 workers—entered into an exclusive 10-year agreement that provides Unifor
members and their families access to reimbursed medical cannabis products directly from AH.
Large unions like Unifor are attracted by AH’s high-touch, clinically-supervised medical cannabis
program, wherein plan members can receive a customized wellness regime, virtual physician
consultation, medical authorization, and insurance-covered products delivered to their door, all in
one business day. We expect Unifor will not be the last union or large employer AH allies with.
On top of all this, AH is materially scaling its adult-use business through the launch of a broad new
product suite—31 new SKUs since Oct. 2020—under a collection of curated brands, and into new
provincial markets. In our view, the ascendance of AH’s adult-use business is at its very start.
Cannabasis wrote: You got a link to that?
grm9727 wrote: Inside the Globe & Mail
A very good article about Aleafia and Raymond James coverage. worth reading the complete statement from R.J. analyst.
Emphasizing its “extremely low” cost of goods and “uniquely strong” medical ecosystem, Raymond James analyst Rahul Sarugaser initiated coverage of Aleafia Health Inc. (
) with an “outperform” recommendation.