GLH given a target of 5$ by Goldman Research ( currently trading at 1.34$ )
GLH shareholders will be gratified to know that major shareholders have such confidence in the outlook and outcome for this Company that holders owning between 20-25% of the current shares outstanding (approx. 15M shares) have entered into a voluntary lockup agreement. This arrangement calls for no sales of stock until January when holdings are then available for sale 1/6 at a time, for six months. This unusual arrangement is a major positive for new shareholders as downward pressure from the sale of stock is reduced and upside is dramatically enhanced.
Golden Leaf Holdings is in an interesting position, valuation-wise. The stock trades in Canada yet does business in the U.S., a much larger and faster growing market. It could be argued that Canada had its act together before the U.S. and thus enjoyed first-mover advantage. However, the Canadian market has been through fits and starts, as evidenced by the volatility in many of the Cannabis stocks that trade on its exchanges.
The Company’s publicly traded peers in Canada include Canopy Growth Corporation (CA – CGC) and Mettrum Health (CA – MT) which trade at market caps of $146M and $51M, respectively. Canopy is the result of recent consolidation in the space and given its cultivation, integration, production, and marketing strategy, it most resembles Golden Leaf. CGC controls 20% of the medical marijuana patient market (Bedrocan) and has a strong recreational brand (Tweed), along with huge greenhouse facilities.
However, for all of its advantages in terms of lead time and leadership status CGC recently reported (pre-consolidation) quarterly revenue of roughly $1.5 million. As noted above, GLH has been generating $1.5M per month! Moreover, even with its recent acquisition of Bedrocan, CGC will likely generate revenue in calendar year 2016 that may be just more than half the revenue we have projected for GLH. Part of the problem is that the size of the medical marijuana market right now is small compared to even Oregon’s 71,000 patients.
At current levels, this bellwether trades roughly 4x CY16E revenue. Clearly, with greater sales, a bigger market, high gross margin and other factors, GLH should immediately be valued at a premium to CGC and other players trading on Canadian exchanges.
Considering the U.S. business and the likely listing of GLH’s shares in the U.S. in 4Q15, we expect a re-valuation of GLH on the upside may occur which could provide a boost to the Company’s overall value. There are many Cannabis-focused companies trading in the U.S. including biopharma companies, equipment manufacturers, vape providers, consumer organizations and others. Unfortunately, since many of the companies could be considered at the low end of the spectrum, and generating little to no revenue, the space has been quite volatile. However, once GLH trades in the States, we expect that the appetite for a Cannabis-focused company with material sales and profit could quickly place GLH in the top tier of valuations.
At a price of $1, GLH’s shares are valued at a paltry 1.05x CYE16 revenue of $60M, which is a ridiculous discount to its U.S. peers and a 75% discount to CGC’s P/S valuation on CY16E sales. As a result, we believe substantial upside exists from current levels. Our price target of $5 represents roughly 5.3x our projected CY16E GLH sales which still represents the low-end of the U.S-traded P/S multiple peers, and is a modest premium to the valuation afforded Canadian-traded CGC. Looking ahead, we expect multiple expansion could occur toward the 8x-10x level on CY16E sales once these shares trade on a U.S. exchange, and as GLH executes its business model. We rate these shares Speculative Buy. |
