Sunniva: A STAR Performer This Year

Execution is the ultimate validation in any new industry.

So it is very fitting that Sunniva Inc. has rewarded patient investors with the best kind of validation – a resurgent share price.

In fact, Sunniva has been the best performer of all of Canada’s top-tier cannabis companies so far in 2019 by gaining around 45% from its low of $2.85 in December 2018 (which was at the height of tax loss selling season in December).

First, the company’s fully operational extraction facility already has secured more than US $2.4 million in orders from one of the company's many existing retail relationships, which should be fulfilled within the first 120 days of 2019. This milestone development marks Sunniva's first branded cannabis product sales in the state of California. The

company anticipates securing additional sales contracts in the near term.

Sunniva's current product inventory has a current estimated wholesale value in excess of US $5 million. At full capacity, monthly output from the extraction facility is estimated at 180,000 grams of distillate and 125,000 grams of live resin extracts, which will supply all Sunniva-branded product categories.
 

Products being launched under the Sunniva house of brands approach during Q1 of this year include the following:
 

In other words, Sunniva is now fully ‘open for business’ and poised to become one of California’s dominant seed-to-sale cannabis companies. Additional scale is on the horizon from the company’s Phase One purpose-built, 325,000 square foot high-tech cultivation greenhouse in Cathedral City (near Palm Springs).
 

This should translate into 50,000 kgs/year of dried flower capacity during Phase One plus an additional 10,000 kgs of trim. The company is anticipating all-in costs of less than $1.00 per gram. Phase Two will involve an additional 165,000 square feet of growing capacity, leading to an additional 22,500 kgs/year of dried flower output. Second, Sunniva has now closed the distribution company acquisition of LTYR Logistics LLC. This represents the crucial final link in Sunniva’s seed-to-sale supply chain, thereby achieving true vertical integration. It also addresses the biggest challenge for the now heavily-regulated Californian cannabis industry – an emerging distribution bottleneck. In this regard, LTYR is a very strategic acquisition because it is already a well-established leader in California’s highly-regulated cannabis distribution business. And LTYR will be compliant with the new “track and trace” regulations in California, unlike many of its much smaller competitors.

Without including the large-scale greenhouse output and revenues, we anticipate Sunniva will sell over US $50 million worth of its Sunniva-branded products throughout California during 2019 through its extraction facility alone.

It is worth noting that Sunniva is very undervalued relative to its US comparable peer group. The US peer group on average trade at 7.1x 2019 estimated revenues. Estimating Sunniva’s anticipated US $50 million extraction facility revenue alone, this would imply a market cap of CDN $461 million. Sunniva currently trades at a market capitalization of CDN $164 million. However, if it continues to demonstrate monthly revenue growth, its market capitalization should grow very soon.

Liquid Gold: A Lustrous Future for Sunniva’s Extracted Products

 

During Q3 of 2018, Sunniva began manufacturing and stockpiling an inventory of high- margin cannabis oils and other value-added extractions at its Cathedral City extraction facility. At full capacity, looking at only one product SKU, this facility will be capable of producing over 350,000 filled vape cartridges a month, as well as large volumes of other concentrates, such as live used for other product lines, as well as an ideal distribution platform to sell them.

At CannabisCapitalist.ca, we have made some back-of-the-envelope projections to demonstrate how much of a prized asset the extraction facility really is. Consider this: let’s assume for a moment that each of the 350,000 vape cartridges contain 0.5 grams of ultra pure cannabis oil. Each of these can be sold at wholesale prices of around US $15. This adds up to over US $5 million in potential monthly revenues, along with significant profit margins.

Yet imagine how much money can be made when Sunniva sells some of these products in its own outlets, where they can command retail prices of US $30-50 each (depending on the quality) This is where Sunniva stands to really hit the ball out of the park with exceptionally high margins on high-volume sales as one of several key verticals in a truly optimized seed-to-sale business model. In fact, such a scenario would significantly increase monthly revenues, and with top-end margins.
 

Sun-Oil Extraction Facility (Cathedral City, CA)

In the near-term, Sunniva will continue to leverage its strategic relationships for the purchase of clean biomass (dried flower and other plant matter) for extracted products until its automated climate-controlled large-scale greenhouse (which promises to be one of California’s most technologically advanced and largest) is operational.

 

Solving California’s Distribution Bottleneck

 

To ensure success in this regard, Sunniva has indeed made a very strategically shrewd move by acquiring LTYR. Besides being compliant with California’s new “track and trace” regulations, LTYR has fully automated sorting, weighing and packaging machines for large-scale distribution, as well as an existing sales force. Additionally, LTYR’s extensive distribution network, consisting of more than 120 licensed retail dispensaries, will be integral to the success of Sunniva-branded products this year.

A proficiency in track and trace regulation is key here because all legally registered distributors are now required to guarantee the tracking and tracing of all movement of cannabis products in California. In fact, distributors are now also responsible for ensuring that every product they bring to market passes testing requirements.

Most importantly, LTYR can guarantee the retail marketplace will benefit from a steady, uninterrupted supply of “clean” and reproducible cannabis products. And with the assurance that Sunniva’s brands will be devoid of any pesticides and other contaminants, Sunniva should not have to worry about product recalls and other supply chain interruptions.

Conversely, many of Sunniva’s smaller competitors (especially outdoor growers) are struggling to comply with California’s new zero-tolerance policy for tainted cannabis products. In such instances, dispensaries are sure to take their business to distributors that can guarantee order fulfillment in a timely fashion, such as LTYR. This alone offers Sunniva a significant competitive advantage.

 

Sunniva’s Flagship Facility: A Near-Term, High-Octane Value Driver

 

In addition to the commencement of sale of high-margin extracted products, the company’s sprawling 489,000 square foot cGMP-certified cultivation greenhouse in Cathedral City is nearing completion.

 

Phase One encompasses a 324,000 square-foot purpose-built greenhouse facility, translating into 50,000 kgs/year of dried flower capacity. And Phase Two will involve an additional 165,000 sq. ft of growing capacity, leading to an additional 22,500 kgs/year of dried flower output per annum.

To achieve meaningful economies of scale and other operational efficiencies, this facility is one of the most technologically advanced in the world. The growing process includes a high level of automation, including labor-saving robotics, micro climatic controls, customized nutrients delivery schedule, and 100% water re-circulation. It bears repeating that such initiatives are expected to lead to growing costs of far less than $1 a gram.

Just to give investors an idea of the potential of Phase One flower cultivation alone, if the company were to earn US $3/gram of flower – which is a highly conservative figure with current wholesale prices for premium dried flower being around US $5 a gram, and with costs below $1.00/gram – that would amount to US $250 million in revenue and $150 million in prospective earnings. The takeaway here is that CannabisCapitalist.ca believes that bottom-line financial metrics will be the biggest value driver for Sunniva in 2019.

 

A High-End Farm-to-Table Dispensary Sets the Tone

 

Significantly, the Sunniva cultivation campus in Cathedral City will also feature its own flagship high-end retail store, which will be stocked with the full variety of Sunniva-branded products, ensuring maximum margins. The dispensary is attached to the cultivation facility and will have large viewing windows that allow consumers the ability to see world-class cultivation first-hand, as illustrated by the schematic below. The dispensary also has a delivery license.

This is the farm-to-table of the cannabis world. Consumers can see exactly where their cannabis comes from, while being surrounded by clean, modern aesthetics that are every bit as inviting as an Apple Store. To further boost Sunniva’s marketing power, the company is also planning to acquire a portfolio of dispensaries all across California, which will further boost margins by offering direct access to retail consumers, rather than using wholesalers.
 

Sunniva Flagship Onsite Dispensary (California Campus)

Investment Summary

 

Sunniva is now leveraging its operational assets in a state that now forbids the sale of cannabis products that contain pesticide residues. With its focus on premium-quality, pharmaceutical-grade cannabis products, Sunniva-branded products are well suited to thriving in California’s new “clean” cannabis marketplace.

To this end, the company expects to produce 72,500 kgs per annum of dried flower cannabis production at peak capacity, starting later this year. Also, the company has the ultimate capacity to product 180,000 grams of distillate and 125,000 grams of live resin extracts annually.

Additionally, a portion of the company’s current inventory of around US $5 million worth of extractions will be allocated to the company’s first US $2.4 million sales order for filled vape cartridges and disposable pens – which promises to be the first of many. Going forward, Sunniva’s branded product lines will include edibles, pre-rolls, beverages, and premium flower from the large-scale greenhouse.

Furthermore, the company’s recent proposal to spin out its Canadian assets and focus solely on California will significantly streamline and sweeten Sunniva’s value proposition once this transformational transaction is completed later this year. In fact, it was largely the uncertainty over the construction timeline for Sunniva’s Canadian growing facility that hobbled company’s share price in 2018.

With a powerful arsenal of value catalysts lined up in California, we believe at CannabisCapitalist.ca that Sunniva’s share price will continue to be ascendant in 2019. We are also confident of fast-escalating revenues in the coming quarters that will truly put Sunniva on the map in a Californian marketplace that is forecast to exceed US $5 billion in medical and recreational sales this year.

Accordingly, Sunniva will likely undergo a re-rating in the investment community as its sales trajectory grows exponentially and investors wake up to the company’s exceptional value proposition.

 

About the Authors: Marc Davis has a deep background in the capital markets spanning 30 years, having mostly worked as an analyst and stock market commentator. He is also a longstanding financial journalist. Over the years, his articles have appeared in dozens of digital publications worldwide. They include USA Today, CBS Money Watch, Investors’ Business Daily, the Financial Post, Reuters, National Post, Google News, Barron’s, China Daily, Huffington Post and AOL.

FULL DISCLOSURE: Sunniva Inc. is a client of Stockhouse Publishing.