Last Friday, following the CEO of Aphria Inc.’s words, Bloomberg News reported that Supreme Cannabis Co. and Aleafia Health Inc. were in the mix of companies trying to make an acquisition. Supreme Cannabis and Aleafia Health did not immediately respond to several calls for comment. Aphria’s traded shares in the U.S. closed with +41% on Friday to raise the wider cannabis sector, after the Canadian company made a surprise profit for its fourth quarter and offered optimistic guidance for 2020.
Another company that is making a profit in the cannabis market is West Coast Ventures (OTC: WCVC) and their flagship franchise, Illegal Burger. They represent America’s first CBD restaurant stock, which combines the fast casual dining and CBD sectors. The IB CitiSet restaurant is on track to exceed $700,000 in sales in the first year of operations, and the IB Writer Square location in Denver is on pace to reach $1 million in sales this year.
The company recently opened a new restaurant in Lauderdale, Florida, Illegal Pizza, which is also expected to reach $700,000 in sales in the first year of activity. Just like the other two, Illegal Pizza offers a CBD dedicated menu, alongside their famous Illegal Brands CBD water.
West Coast Venture Group has generated consistent growth since launch and expects it to continue throughout 2019 and 2020.
Aphria said it had a net profit of $15.8 million ($11.9 million), or 5 cents per share, compared to a loss of $5 million, or 43 cents per share, last year. Sales have increased more than tenfold to $128 million from $12 million since 2018.
The company said it expects tax revenue for 2020 net of excise duties from $650 million to $700 million. There are no reliable FactSet estimates for the company, but GMP said the numbers and outlook were strong and reiterated its purchase rating on the stock.
Analyst Justin Keywood said a government contact at the distribution level gave “very positive feedback” about Aphria in a recent call.
“The quality of Aphria’s products has been mentioned as one of the best of all LPs and our contacts have also stated that the company has significantly improved at the operational level,” the analyst wrote in a note to customers. “We also heard that Aphria has made significant efforts to improve relationships with its partners and distributors since the transition last year.
Jefferies analyst, Ryan Tomkins, agreed. “In the context of unfavorable industry sentiment, profitability is becoming a growing focus and poor orientation, this press is very reassuring and supports our belief in the name,” he wrote in a note to customers. Tomkins also values the share as a purchase.
Aphria CEO Irwin Simon told MarketWatch that the company’s success is partly due to efforts to keep growth costs low.
It helps reduce marketing costs, given Canada’s strict promotion laws. But the company also benefited from $50 million received from Green Growth Brands Inc. after the company’s hostile takeover bid failed. Green Growth launched the offer after the short sellers published a report that questioned several of the company’s activities and pointed out alleged wrongdoings by former executives related to several acquisitions.
Aphria said it will receive an additional $39 million in November from Green Growth.
Chronos
Cronos increased by 8.7%, after the company stated it is acquiring four subsidiaries of Redwood Holding Group LLC, a manufacturer of skin care products infused with CBD and other products, for $300 million shares and cash.
Redwood was co-founded in 2017 by Robert Rosenheck and Cindy Capobianco, who will join Cronos and continue to lead their platform. Under the terms of the agreement, Cronos will pay $225 million in cash and the balance of the newly issued shares. Tobacco giant Altria Inc. has invested $1.8 billion in Cronos, acquiring a 45% stake.
Tomkins of Jefferies said the deal works in several ways. “First, it’s running their big pile of cash,” he wrote in a note to customers. “Second, it gives visibility to the world’s largest market. Third, it seems strategically smart. We discussed for a while, unless it is FMCG (consumer goods company) or an already established CBD brand, it will probably be difficult to penetrate.
However, with the Cronos stock continuing to trade at a higher price than its competitors, Tomkins maintains an underperformed rating: “We think that investors are looking for security in the vast mass of liquidity and also take the Altria investment as validation of a superior business model,” he wrote. “With cash being not a long-term source of value in itself and the model still to be proven (let’s not say it won’t), we think the valuation is too rich at these levels.
Mike Gorenstein, CEO of Cronos, also co-founded Gotham Green Partners, which owns shares in the Redwood Holding group and in Cronos itself.
The share of Sundial Growers Inc. (SNDL),+23.23% closed the year up 23%, recovering part of the 30% loss suffered on Thursday on its first day of trading on Nasdaq.
The Canadian licensed manufacturer valued its initial public offering at $13 per share. The company reported losses of $16.7 million, or 24 cents per share, in the March quarter, with revenues of $1.7 million.
Renaissance Capital, a provider of institutional research on IPOs and ETFs, said the three things investors need to know are:
- It has two facilities in Alberta with an annual capacity of 60 million grams and is adding a new facility in British Columbia to reach a total annual capacity of 95 million grams.
- The Canadian recreational cannabis market is expected to reach $4.8 billion by 2024.
- Unprofitable and exploited; expansion will require significant investment.
