Cannabis investors shouldn’t despair at the short term, new agile businesses like GreenStar Biosciences Corp. (CSE: GSTR) provide new opportunities and companies like Aphira, Flowr Corp. and CannTrust Holdings are likely to see a strong recovery
Investments in the Cannabis industry should bring a lot of money to investors in the long term. Between 2018 and the end of the next decade, legal annual sales could increase from $10.9 billion to $200 billion worldwide. Companies like GreenStar Biosciences Corp. (CSE: GSTR) are seeing huge success even while the giants are facing problems.
While big companies might be struggling depressed prices offer opportunity for investors who are willing to take a roll of the dice. Either by taking a chance on a larger company that has fallen on hard times or by looking at a promising up and coming player with the potential to grow.
First, Aphria, whose turbulent history has recently reduced its market capitalization to $1.6 billion, despite the fact that the company expects a peak annual production of 255,000 kilos when fully operational and that it is present in nearly twelve countries, including Canada.
The biggest problem for Aphria was acquisitions. In December, Quintessential Capital Management, in association with Hindenburg Research, released a scathing report alleging that Aphria had paid grossly too much for the purchase of assets in Latin America.
Although an independent committee reviewed these allegations and found no support for them, Aphria eventually recorded a write-down of C$50 million on its Latin American assets in its accounts in a subsequent quarter, and Vic Neufeld, a long-standing CEO, withdrew after the committee identified conflicts of interest regarding this agreement.
In addition, Aphria’s purchase of Nuuvera in March 2018 was questioned after it was disclosed just one day before the closing that a handful of Aphria’s executives held a position in Nuuvera’s shares.
In other words, Aphria is facing a serious crisis of trust, and the best way forward for the company could be a merger or acquisition. Aphria would offer a claimant immediate access to a number of foreign markets, as well as an annual production of 115,000 kilos. This number will increase when its flagship facility, Aphria Diamond, capable of producing 140,000 kilograms per year at full capacity, is licensed in Canada.
Another major producer whose shares appear cheap is Flowr Corp.
Penalized by a proposed IPO on the Nasdaq that was finally aborted, the company ended last week with a market capitalization of only $269 million.
However, Flowr can bring a lot in terms of production to a potential suitor. First, there is the production of at least 50,000 kilograms of the company’s products on its Kelowna, British Columbia campus. The Kelowna campus focuses specifically on high quality and ultra-premium dried cannabis flowers and their derivatives. There is simply not much supply or competition in the high-end space, which means that Flowr should have excellent pricing power and margins.
CannTrust Holdings Inc.
While this is undoubtedly a risky gamble, CannTrust Holdings, a struggling marijuana producer, could also be attractive to a large producer with access to capital.
CannTrust has had a nasty fall in recent weeks. In early July, the company announced that it was growing unlicensed cannabis at its Niagara facility. It was then learned that some senior managers were aware of this deception, but that they allowed it to continue, resulting in the dismissal of his boss Peter Aceto. Deficiencies were also discovered in its much smaller production plant known as Vaughan. Currently, sales are suspended until the regulator, Health Canada imposes its sanction.
The obvious risk for an acquirer is that CannTrust could have its cultivation and/or sales licence withdrawn. An acquirer may be able to persuade Health Canada that a new management team can address any regulatory concerns at CannTrust, but there is no guarantee.
While big companies are facing difficulties their smaller competitors are taking advantage of the breathing room. Greenstar has leveraged extensive experience in the Canadian cannabis sector into a successful American facing company.
They operate their tenant partner Cowlitz, that produces and delivers high-quality cannabis products at an affordable price, recorded incredible revenue of $14.6 million at the end of 2018. The company has a number of outdoor facilities and is in the process of finalizing partnerships with hi-tech indoor growers which makes them resistant to supply shortages. All of this allows them to generate a secure revenue of $3 million per quarter and growing.
This represents an incredible growth opportunity for investors who are interested in the emerging American legal marijuana market and an alternative to some of the sluggish giants currently operating in the sector.