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Undervalued Canadian Cannabis LP Gets Independent Buy Rating

Stockhouse Editorial
0 Comments| May 31, 2019

A deep well of assets mixed with a diverse supply of sources, scaling into international markets with a low market cap. There is a lot good news to unpack with the latest analyst report looking at Canadian LP Aleafia Health Inc. (TSX: ALEFOTCQB: ALEAFForum).

Independent investment house Eight Capital gave the Company a BUY rating and a target price of $3.00. The report also predicts an expected earnings growth of 95 per cent for the Company. This upside is bolstered by an appealing top-line trajectory that also doubles in roughly three years’ time, which could indicate a high-quality bottom-line expansion, rather than cost-cutting measures.

Aleafia Health has been working to manage its cash and cost levels, while showing indicators for solid financial health and can use its cash flow to meet any challenges that could arise. Maintaining a very reasonable 5.4 per cent debt-to-equity ratio, ALEF has been using low-cost debt funding to its advantage without feeling the weight of strict debt terms, offering financial flexibility.

This is the first report from an independent investment house for the Company and helps validate its long-term story.

Where does this long-term story lead? The report forecasts ALEF selling 67,500 kg. equivalent of cannabis by 2021 at an average price of $4.30 a gram at an all-in cost per gram of $2.15, which aligns with the firm’s expectations for the Company’s peer group.

“We expect gross margins and EBITDA margins to move towards 50 per cent and 28 per cent, respectively, over the long-term, which are in-line with peers of similar size. We estimate 80 pe cent of our net cannabis revenue coming from the adult-use market, with the remainder from medical.”

Click to enlarge

Eight Capital’s buy rating is also reflected by the fact that Aleafia offers a unique product and brand portfolio that can scale effectively into medical and adult-use markets. Through its game-changing all-stock $173 million acquisition of Emblem Corp. (TSXV: EMC, OTCQX: EMMBF), Aleafia Health secured a key piece to its growth strategy - a medically-focused cannabis Company. This acquisition provided ALEF with additional strains, oil formulations, capsules and an oral dose-metered spray.

“We expect the Emblem portfolio to continue to drive product innovation moving forward via its 30,000 sq. ft. production facility. ALEF also has an equity investment in Flying High Brands and strategic partnership with GreenSpace brands, which could allow ALEF to differentiate its products in the future.”

Aleafia Health gained the largest network of cannabis clinics in Canada through this deal, at 40 locations serving roughly 60,000 patients. This pushes the Company to around the same size in cannabis production as Cronos Group (NASDAQ: CRON) yet it only has 1/10th the market cap with a far deeper product line and many more patients. In fact, Cronos turned to Aleafia Health to partner on its joint medical cannabis study, coupled with an chronic pain study with industry juggernaut Tilray (NASDAQ: TLRY) while also securing a $10 million investment from the Surruya family in 2018.

For a Company that only recently up listed to the TSX, Aleafia Health Inc. is a sleeper hit in the cannabis marketplace for its constant successful plays while remaining an efficient bargain that should be appealing for investors.

FULL DISCLOSURE: This is a paid article produced by Stockhouse Publishing.

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