Picking the winners in the next Green Rush
By: Kevin Silva
Cannabis investors in Canada have enjoyed — or suffered — a wild ride over the past four months, with share prices soaring to stratospheric levels in November and January, then crashing back to earth in January.
So, is the so-called Green Rush over, or is there another market bounce on the way?
Many analysts believe the latter scenario is true, and that there will be a significant increase in share prices for many of the nation’s publicly traded cannabis companies between now and June or July, when recreational cannabis is legalized nationwide.
However, investors are becoming more picky in their choices. There are more cannabis companies being publicly traded, particularly those located in Ontario and BC, and the message is sinking in that not everyone will be successful in an increasingly crowded market.
The question is, which companies will see the larger increases over the next four to six months, and which will languish in the shallows?
Manitoba’s Delta 9 is Poised for Significant Growth
Two trends have been emerging in early 2018. The first is the rise of dominant regional players, such as OrganiGram Holdings in Nova Scotia, CanniMed Therapeutics in Saskatchewan, Hydropothecary Corp. in Quebec, and Delta 9 Cannabis Inc. (TSX.V: NINE) in Manitoba. The second trend is the targeted acquisitions of those same regional Licensed Producers by the larger producers.
The largest and most obvious of those acquisitions was the buyout of CanniMed by Aurora for a stunning $1.1 billion. An amount that doesn’t make sense until you realize CanniMed is the dominant LP in the Province of Saskatchewan.
Similar acquisitions have been taking place over the past two years, led by Canopy Growth, which has acquired one or more licensed producers in most of the Canadian provinces. At the recent Canaccord Cannabis Conference in Vancouver, CEO Bruce Linton told investors that Canopy believes provinces will favour companies that have operations in that jurisdiction to help create local jobs, and that Canopy’s goal was to own at least one LP in every province.
That brings up Delta 9 Cannabis, a Winnipeg-based Licensed Producer that just acquired one of only four licenses for cannabis retail stores in Manitoba.
That makes Delta 9 a very interesting company for investors over the first two quarters of 2018. Delta 9 not only boasts a massive production capacity with low production costs, but will have the ability to sell their products at retail, in a province with only four competitors. It’s a powerful combination that doesn’t fit with Delta 9’s surprisingly low market cap.
Craft Grow Production, at an Industrial Scale
If you don’t know this company, you should. Delta 9 was the fourth company in Canada licensed to produce cannabis, which has been in the news recently for developing a unique and proprietary system of ‘grow pods’.
These grow pods allow Delta 9 to grow small batch, hand trimmed, high quality medical cannabis strains in a ‘craft grow’ environment, but on a truly industrial scale. The company’s grow pods are built from converted steel shipping containers, which allow the company to stack them like Lego bricks for increased production per square foot.
The company is fully financed to build out 600 of these grow pods that at capacity can yield 30 to 35 kilos of cannabis annually each, at an aggregate market value of roughly $170 million per annum. The company also has plenty of room to grow, with a large acreage, and roughly 835,000 square feet of expansion space.
On top of that, Delta 9 recently expanded its footprint in the Prairies with the acquisition of a 50 per cent interest in Westleaf Cannabis, providing an additional 4,000 kilos of production with Delta 9’s proven grow pod technology.
But, none of that means anything unless the company can sell its product, and that’s why the issuance of provincial retail licenses or supply agreements is so important.
Delta 9 the Local Favourite in a Half Billion Dollar Market
While the company’s deep experience and solid production methods are attractive, the key metric for investors over the next two quarters will likely be market access. In other words, growing weed won’t mean much if you can’t sell it at an attractive margin.
The Province of Manitoba announced on February 15 that the consortium of Delta 9 and its joint venture partner Canopy Growth had received conditional approval for one of four retail licenses; the conditions being that the company agrees to be bound by provincial regulations and signs the formal agreement.
Those licenses allow Delta 9 to open retail stores throughout the province, through which they can not only sell their own products, but also cannabis products from Canopy Growth and other producers.
It’s also great news for the other license holders, but it seems likely Delta 9 will lead the pack. As the first Licensed Producer in Manitoba, Delta 9 is extremely popular with local buyers. Most investors don’t know this, but Delta 9 holds 35 per cent market share in Manitoba, against all the other producers combined.
From an investor point of view, the core value is the fact Delta 9’s market cap at $158 million, just before the license award, is still much lower than that of similar companies in a similar position.
OrganiGram (OGI), with its dominant position in New Brunswick, and a supply agreement in the province, has a market cap well in excess of $600 million. The Hydropothecary Company (THCX), which was recently awarded a supply agreement in Quebec, has a market cap in excess of $700 million.
But neither of those companies can sell their product at retail, and neither can have their own retail stores. This is what puts Delta 9 in a unique position among the smaller Licensed Producers in Canada.
Is Delta 9 the Sleeper Pick Among Cannabis Stocks?
With one of only four licenses in a market estimated at between $300 million to $500 million, Delta 9 clearly appears to be among those companies with a lot of upward potential. The stock prices began moving north immediately after the announcement, but that’s in a market that remains somewhat frigid after the corrections in January.
If there is one more ‘Green Rush’ on the way in the lead up to full legalization, Delta 9 appears to be in a solid position to enjoy a lot of that upside, and this is not going unnoticed.
Beacon Securities analyst Vahan Ajamian noted Delta 9 seems to be wildly undervalued considering the progress it has made with an acquisition in Alberta, retail licenses in Manitoba, and being fully funded for 17,500 kilos of production.
“Given the multitude of potential catalysts,” Ajamian wrote, “Delta 9 may be the sleeper pick for the quarter.”
Ben Smith at The Midas Letter agrees, saying he believes there will be a third major rally in overall cannabis prices, but it will be led by companies that are perceived to be undervalued, and that have access to the retail market.
“Should that third up leg occur, I believe it will be driven by mid-market (companies) which maintain lower ascribed valuations,” Smith says. “I believe (Delta 9 Cannabis (TSXV: NINE)) could be undervalued relative to their growth potential and strategic positioning.”