Although 2022 has been a challenging year for the global cannabis industry, we believe the weakness has created an excellent opportunity to invest in operators that are undervalued and have significant growth prospects.
When analyzing a North American cannabis business, we look for operators who meet the following criteria:
- Led by a management team with a proven track record of execution
- Operates a business that generates positive cash flow or positive adjusted EBITDA
- It has potential event-driven catalysts and represents a differentiated opportunity
- It is well capitalized and has the resources needed to capture additional market shares
- Is the trade at a valuation that offers significant upside potential (when analyzed on basic operating and profitability metrics)
With just a few months left in the year, we’re working to identify North American cannabis businesses that possess these traits and are flying under the radar. Today, we want to highlight a Canadian cannabis company that is well positioned to record strong growth in 2023 and beyond.
The company, Cannara Biotech Inc. (TSX Venture: LOVE) (OTCQB: LOVFF) (FRA: 8CB), is a Canadian Licensed Producer (LP) that meets our criteria and we believe the business has a favorable risk-reward profile.
The vertically integrated Canadian cannabis company has more than 1.6 million square feet of manufacturing capacity and is the third largest Canadian LP (based on square footage of manufacturing assets). Over the past year, Cannara has reported a number of positive developments and we are bullish on the growth trajectory of the business.
From strengthening the balance sheet to creating strategic partnerships, the management team is focused on creating shareholder value, and we want our readers to understand why we are excited about the opportunity. We consider Cannara a differentiated growth opportunity due to the following:
- Scalable growth – Cannara purchased a state-of-the-art facility for a fraction of what it cost to build and the management team is executing on a calculated multi-phase expansion strategy
- Elite Product Portfolio – From having a strategic partnership with Exotic Genetix (a 50x rated US cannabis breeder) to developing new high demand products, Cannara has launched several high demand products that are taking the of the market in provinces across Canada
- Profitable – Cannara Biotech has recorded positive Adjusted EBITDA for five consecutive quarters and we consider this trend to be a key pillar of the story. The trend is a testament to the strength of the management team and its focus on creating shareholder value
An underrated growth story
Cannara currently sells cannabis in Ontario and Quebec (2 of the 4 largest Canadian provincial markets) as well as Saskatchewan. After receiving approval to become a licensed seller in the British Columbia Cannabis Shop (BCBS), the business’s growth profile has further improved.
As of October, Cannara will also list in the province of British Columbia and expects to receive listings soon in Alberta. Once the company establishes a presence in these markets, the business should be able to capture market share in the four largest Canadian markets. Since the market has yet to place much value on the company’s larger footprint, we consider this an undervalued part of the business.
Based on Cannara’s production footprint, the Canadian cannabis company can produce up to 125,000 kilograms of high-quality cannabis per year. We believe that the management team is getting the strategy right when it comes to increasing production capacity and we want our readers to be aware of this aspect of the story.
While many Canadian LPs scaled too big and too fast, Cannara benefited from a patient approach to growth. While most of the company’s peers are closing facilities and writing off assets, the business is benefiting from the management team’s calculated growth strategy and we are keen on the potential revenue the business can generate.
A fundamentally strong cannabis business
Over the past few quarters, Cannara has evolved into one of the fastest growing indoor cannabis growers and has captured a significant market share in Quebec. At current levels, we believe the market is underestimating the value associated with Cannara’s expansion strategy and view this as an important pillar of the opportunity.
Another important pillar of opportunity is balance. Over the past year, Cannara has focused on strengthening its balance sheet and we are favorable to the amount of resources the business has to scale operations.
A few months ago, Cannara closed a $50 million non-dilutive credit facility led by BMO Commercial Banking. We view the credit terms as favorable and will monitor how the management team uses the capital to create more shareholder value.
We believe the management team’s decision to acquire a facility in Quebec was strategic for several reasons. First, the facilities owned by the company are located in the same province. Second, the company will receive favorable labor and electricity prices due to the facility’s location. As a result, the Canadian cannabis company can reduce two of the biggest cost factors in growing cannabis, and we consider this to be an underrated aspect of the story.
Trading for a discount when compared to its peers
At current levels, Cannara is valued at less than C$100 million (based on market capitalization) and we believe the market is undervaluing many important business verticals. With approx. $30 million in revenue trailing 12 months, we view the company’s risk-reward profile as favorable and believe the business has clear catalysts for growth.
When comparing business year-over-year, we consider production rate to be one of the most important metrics. On a comparative basis, this amount has almost doubled compared to 2021 and we believe this gives clarity to the level of income that can be generated from the business.
Over the next year, we expect Cannara to increase production capacity, capture more market share of the global cannabis sector and bring more cannabis products to market. We believe that Cannara has the necessary resources to scale the business and are conducive to the management team’s calculated growth strategy.
As Cannara continues to implement high-profile growth initiatives, we expect the business to receive additional coverage from broker-dealers. Once this starts to happen, overall investor interest should increase steadily, and we want our readers to be aware of this possibility before it happens.
If you are interested in learning more about Cannara Biotech, please send an email to [email protected] with the subject “Cannara Biotech” to be added to our mailing list.
Pursuant to an agreement between StoneBridge Partners LLC and Cannara Biotech (LOVE) we have been engaged for a 90-day period beginning on October 1, 2022 and ending on January 1, 2023 to publicly distribute information about Cannara Biotech including on the website of internet and other media including Facebook and Twitter. We are being paid $3,000 per month by Cannara Biotech and have been paid “ZERO” shares of unrestricted or restricted common stock. We plan to sell “ZERO” shares of Cannara Biotech that we hold during the time that the Website and/or Facebook and Twitter Information recommends that investors or site visitors buy without further notice to you. We may buy or sell additional shares of Cannara Biotech in the open market at any time, including before, during or after the website and information provide public distribution of favorable information.
Author from
Michael Berger
Michael Berger is Managing Partner of StoneBridge Partners, LLC and founder of Technical420.com. Prior to entering the cannabis industry, Michael was an Equity Research Analyst at Raymond James Financial covering the Energy Sector. Michael has been featured in publications such as The Street, Bloomberg, US Money News and hosts various cannabis events across North America.
