Recently I mentioned to our readers a company based in Oregon, called CV Sciences. At the time of mention, their stock price was USD$0.42. At the time of writing this, it currently sits at USD$5.53 (yeah, you read that right).
The big news in the past month was the IPO of Charlottes Web – the number one selling CBD product range in the US. It opened with great fanfare after raising (in a bought deal) $100m prior to the IPO. The stock listed at $9.70 on the 30th August and immediately traded up. It currently sits at $16.00 (and that's in 12 days!)
The stocks are being driven by the changing landscape of the Hemp market. The recently submitted Hemp Farming Bill of 2018, sponsored by the Senate Majority Leader, Mitch McConell aims to remove Hemp from its current Schedule 1 status and allow for mass industrial production across the US. An already booming market would instantaneously experience hyperbolic growth.
The Hemp market
The U.S. hemp industry is poised to reach a $1.0B market in 2018 led by hemp-derived CBD, food, personal care, and industrial products. As legal and regulatory barriers are removed and consumer education spreads, Hemp Business Journal estimates the U.S. hemp industry will grow to a $1.9B market by 2022 with an estimated 5-year compound annual growth rate of 14.4% (2018-2022).
Industrial hemp is an agricultural commodity, that is cultivated for use in the production of a wide range of products, including foods and beverages, cosmetics and personal care products, nutritional supplements, fabrics and textiles, yarns and spun fibers, paper, construction and insulation materials, and other manufactured goods.
Hemp can be grown as a fiber or seed. Botanically, industrial hemp and marijuana are from the same species of plant, cannabis sativa, but from different varieties or cultivars that have been bred for different uses.
The U.S. hemp industry grew 16% in 2017 amidst continued domestic legal and regulatory challenges. The hemp industry was bolstered by explosive growth in the hemp-derived cannabidiol (CBD) category that grew from a market category that did not exist five years ago to $190M in sales in 2017.
There is no doubt that CBD is the new buzzword. From the medicinal laboratories of the largest Canadian producers to the juice bars on Rodeo Drive, everyone is talking CBD.
As more U.S. states legalise medical cannabis, and as scientific research becomes more widely accepted and more regulated by governments, CBD product sales are expected to eclipse $2 billion by 2020, according to the Hemp Business Journal.
So, for those that may have missed out on the two stocks mentioned above, I strongly believe there is a way to play the Hemp market for big gains. And the time is now.
I am talking about Elixinol, a leading hemp producing company, based out of Sydney Australia, and Broomfield Colorado. The company listed on the Australian Stock Exchange (ASX) in January of this year at AUD$1 (raising $20m in the process) and to be honest, really struggled for the first 6 months.
This is not the first time I have spoken about them. I mentioned that I was adding Elixinol to The Green Fund's Paper Portfolio about 8 weeks ago when the stock was at $1.45. At the time of writing, it sits at $1.95 and I honestly believe it has a long way to run.
The group's portfolio comprises three main divisions: Elixinol USA focused on dietary supplements; Hemp Foods Australia selling food products; and Elixinol Australia, the new start-up focused on medicinal cannabis.
- Elixinol, which was founded in 2014, is a manufacturer and global distributor of industrial hemp-based dietary supplement and skin care products, with operations based out of Colorado, USA;
- Hemp Foods Australia, which was founded in 1999, is a leading hemp food wholesaler, retailer, manufacturer and exporter of bulk and branded raw materials, and finished products;
- Elixinol Australia, which was founded in 2014 to participate in the emerging Australian medicinal cannabis market and submitted license applications for cultivation and manufacture to the Office of Drug Control in early CY 2018. These applications are currently pending approval.
Elixinol USA is the main business and it manufactures and distributes CBD nutraceuticals to the US markets (primarily) and to other countries (they are the first company to launch a CBD product in Japan).
Recently the company released their 6-month, mid-year, financial report, and the results were superb. Sales of AUD$14.9m which was an increase over the first half of 2017 of more than 110% Q2 sales accelerated from Q1 when growth was at 94%, and the company announced its first profit (the first Australian listed Cannabis entity to do so).
Their first-half growth was driven by strong sales in the consumer products division, which includes hemp-derived foods and dietary supplements. Its Hemp Foods Australia business reported a 71% jump in revenue to $2.3 million while Elixinol USA delivered a 119% revenue increase to $12.5 million
The CBD sales represented about 84% of overall sales and grew by 119%, generating EBITDA of AUD$2.2 million (17% EBITDA margin). The strong growth resulted from a notable increase in product sales, driven largely by the Colorado-based business. The company used AUD$1.27 million to fund operations in the first half of the year.
According to the company's 2018 mid-year results release, Elixinol is following a disciplined approach to driving growth, supported by investment in farming and production capabilities in Colorado. A channel sales strategy is in place to drive growth in the higher-margin e-commerce, national accounts, mid-market accounts and private label branded products segments.
In the US, the company has invested in farming and production capabilities including securing a cultivation joint venture with Kersey Ag Company to produce and supply high cannabidiol hemp.
As a result of the joint venture, Elixinol USA will relocate to a larger production facility in Colorado, expanding its production capacity from 8,700 square foot to 20,700 square foot. The commissioning of this new facility is on track for completion later this year.
Key sales hires focused on national and mid-market distribution were made to drive future sales and higher margin growth. Additionally, investment was made by Elixinol to scale e-commerce in the US, Europe, and Japan, and to support an increase in marketing activity during the period. A number of new products are expected to be launched in calendar 2019.
Based on their latest filing the company has about 103 million shares outstanding, giving it a current market cap (at time of writing) at $1.95 of AUD$200 million (about USD$142 million)
So why am I so bullish on them? Well, when you compare them to their 2 peers (CV Sciences and Charlotte's Web), they trade at a significantly smaller market cap. In addition to that, the sales of their Hemp Food Business have not properly matured, and once (if) they get their medicinal licenses in Australia, there could be significant upside in future revenues.
Elixinol's revenue growth is in-between that of its peers and they all produced reasonably similar positive EBITDA results. Charlotte's Web reported H1 EBITDA of USD$9.8m, CV Sciences USD$4.1m, and Elixinol USD$1.6m. Looking at the price to sales metric, Elixinol trades at 12X six-month trailing CBD sales, while Charlotte's Web is at 28X. CV Sciences is at 25.5X.
I honestly believe that Elixinol could be an acquisition target and there are a few types of suitor that fit the "buyer" profile. One would be a large Canadian Licensed Producer looking to gain access to the Hemp (and CBD) market.
At the same time, it would be very appealing to any US-based business that is looking to gain access to the Hemp market post the 2018 Hemp Farming Bill being passed (which it is likely too).
Even without the potential of a premium buy-out, Elixinol is doing just fine in executing its own organic growth strategy. They plan to expand cultivation in the US and have already started globalising their product reach.
I expect the stock to perform well given the increased investor focus on CBD, especially if the Farm Bill advances. I believe that the company's CBD operations alone should command at least US$220 million (about 12X 2018 projected sales). As for their Australian Medicinal Cannabis division, I would expect over time that this entity, when licensed, would justify another AUD$100 million of value.
Adding this AUD$100 million for the medical cannabis division and AUD$310 million for the Elixinol business would give the company a value of around AUD$410 million, suggesting the stock could more than double (AUD$4 per share). As you can see from their performance above, I really believe this stock could run, and run hard, as the US Hemp Market opens up.
I am increasing the position in the Paper Portfolio and am extremely bullish on the company and the sector it operates in.