Golden Leaf Holdings, no Smoke & Mirrors, Soaring Sales
Golden Leaf Holdings, no Smoke & Mirrors, Soaring Sales
by Peter Epstein, CFA, MBA | posted in: Golden Leaf Holdings, Interviews, Marijuana Related | 0
North America’s Marijuana Sector, Best Way to Play, Without Getting Smoked
In the past 18 months, Marijuana sector investors have been on a roller coaster. News regarding Canadian-domiciled weed companies from regulatory agencies & stock market exchanges has caused sentiment to swing wildly. Valuations of dozens of companies reached absurd levels, subsequently crashing. Weed extravaganzas morphed into weed wipe outs. This article is not about a high-risk Canadian pot play, but a made in America opportunity with something the majority of Canadian counterparts sorely lack…. revenues.
Canada was the de facto safe haven for Marijuana company investors. Never had the ~40,000 legal, card-carrying Canadian medical Marijuana patients been so popular! Dozens of public & private Canopy Growth Company-like business models are still clamoring for those patients. However, in the relaxed & healing State of Oregon alone, [Adult population ~ 4 million] there are thought to be 10x that number of legal (at the State level), consumers. That’s why I’m so excited about Golden Leaf Holdings (CSE:GLH). Golden Leaf has enjoyed soaring sales month after month since September 2014. [Excellent Corporate Video]
Golden Leaf is a leading Marijuana oil & solutions provider in North America built around recognized brands. The Company leverages advanced R&D from Israeli subsidiary, Green Point Science Ltd., to compliment its expertise in growing, extracting, refining & selling oils. The Company’s prowess facilitates low-cost production of high quality oils and, eventually, other Marijuana-related products emanating from the Company’s powerful Intellectual Property. Management believes the Company is already a top processor of oils & retailer in Oregon.
Golden Leaf has a proven management team & Board. Not just with impressive prior experience, but proven by 15 months of rapidly increasing sales. Measured by revenues, Golden Leaf’s team is arguably one of the most experienced in North America. Execution to date need not be scrutinized, the Company has traversed the legal, logistical & compliance quagmire. Sales are soaring, reaching US$ 3 million in the third quarter alone, up 900%. Extrapolating historical growth, [and assuming 15% quarterly sales growth, my opinion only], would result in CY 2016e sales of ~ US$ 23 million. This figure gives zero credit for potential expansion in Oregon, or entry into Washington State. Nor does the 2016 estimate attribute any potential sales from its exclusive licensing agreement with Dixie Brands Inc.
[NOTE: Historical results are not indicative of future performance] Gross margins are strong, increasingly benefiting from (feed weed stock) grown internally for use in an expanding list of products. For evidence of the Company’s achievements and staying power, please visit its Brands Webpage. The production value and clean, professional articulation of Golden Leaf’s brands and mission statement reminds one more of Apple Inc. then peers more readily resembling something Spicoli of Fast Times at Ridgemont High might conjure up.
Legal Use of Marijuana products in the U.S. Will Continue to Grow at Tremendous Rate
The recreational use of Marijuana, legal in the U.S. States of Colorado, Oregon, Washington & Alaska, is serious business, best left for corporate interests to manage. Most pundits agree it’s a question of when, not if, recreational usage is adopted in a number of key States such as California & Nevada. Interestingly, adoption by individual States is proceeding largely the same way in which States legalized gambling. Only a few at first, now it’s legal in 23 States. Likewise, there are 23 States & the District of Columbia that allow medical Marijuana. There’s no reason to doubt recreational acceptance will grow.
Unlike the gambling sector, Marijuana supply is dominated by small, inefficient, private companies. Yet, the difference between these Moms & Pops and corporate interests have never been so stark. Any company is as good as its weakest link. Such is true in the emerging U.S. Marijuana sector. Weak links can be found everywhere {security, compliance, legal, accounting, bookkeeping, quality of facilities (to withstand crop disease), consistent application of proven, documented procedures, pricing & marketing, among others.
 Most Moms & Pops are destined for failure, it’s a matter of time. If mismanagement, a failed crop and/or working capital deficits don’t sink them, lack of economies of scale will.
Moms & Pops are no match for larger, stronger, “category killers.” In Oregon, Golden Leaf is becoming a category killer. According to management, it’s already one of the top (growers / processors) and retailers in the State. If the Company can achieve staggering success in Oregon, why not Washington State and beyond? [Excellent Corporate Video]
GW Pharmaceuticals (GWPH) is among a few widely accepted, somewhat mature, Marijuana-related companies. It trades at an Enterprise Value, “EV” [market cap + debt – cash] to trailing 12 month, “TTM” Sales ratio of roughly 35 times, (35x). Applying a 35x multiple to Golden Leaf’s estimated (by me, not official or unofficial guidance from management) CY 2016e revenue of US$ 23 million, equates to a hypothetical valuation of US$ 800 million! Canopy Growth Corp. is trading at 28x. Golden Leaf can be compared to revenue generating peers on tangible metrics like sales & gross margins, as opposed to the number of leased square feet or weeks from medical Cannabis application approval.
Make no mistake, Golden Leaf Holdings (CSE:GLH) highly speculative. There are few legal precedents to go by and no leaders to emulate. However, the Company has benefited immensely from first mover advantage. It’s surprising that a few years into Marijuana Madness, there’s still first mover advantage to be had. That fact alone speaks volumes as to the ability of Moms & Pops to sustain themselves and the intensifying difficulty of managing the above mentioned factors.
Valuation, Separating the Wheat from the Chaff, the Weed from the Trim
When it comes to valuation, Golden Leaf is intriguing…. it can actually be compared to other revenue-generating players. This is fact, not opinion. I mentioned GW Pharmaceuticals, trading at roughly a 35x EV/TTM Sales ratio. That premium valuation is no doubt due to rapid top line growth. Golden Leaf has even stronger top line growth prospects, albeit from a smaller base. However, one need not compare Golden Leaf to GWPH, there are a number of useful comparisons, “comps” available for study. [NOTE: calculations, assumptions & opinions regarding valuation are entirely my own]
I screened a universe of 71 U.S.-listed Marijuana-related stocks based on TTM figures as of 9/30/15. 21 had TTM revenue equal to or greater than US$ 100k, I named those 21 the, “peer group.” The peer group’s average EV/TTM Sales ratio was 8.2x. Of the peer group, 11 have significant debt, ranging from 26.4% (debt / EV) to 93.3% (debt / EV), averaging 54.3%.
Golden Leaf has ~ 62 million shares outstanding. The Company’s EV, with zero debt and a stock price of C$0.94 on 12/8/15, was C$ 58 million. Since Golden Leaf’s sales are in US$, I converted the C$ EV to a US$ EV of US$ 43 million. That suggests Golden Leaf is trading at a 1.87x EV/2016e Sales multiple. (Note: CY sales of US$ 23 million assumes 15% quarterly growth)
Golden Leaf’s Valuation — Safe to Inhale – Organic & Triple Tested!
Before delving more deeply, readers should consider the downside scenario for a company generating millions in sales, with zero debt and modest cash burn. Comparing Golden Leaf to pre-revenue peers, some with larger market caps and/or troublesome levels of debt, is insightful…. To ensure this valuation exercise is apples to apples, (all comps are based on estimated CY 2016e data). I assumed 100% average annual sales growth for the peer group. Assuming 100% sales growth, the peer group average EV/TTM Sales ratio would halve from 8.2x to 4.1x.
The pro forma 4.1x peer group multiple measures debt in the EV calculation, but does not consider the risk of having high debt leverage. Golden Leaf’s zero debt balance is arguably grounds for a premium multiple. All else equal, ignoring debt leverage, at a 4.1x EV/TTM Sales ratio, Golden Leaf’s stock would have a per share valuation of [4.1x * US$ 23 million = US$ 97 million in 2016e sales, divided by 62 million shares outstanding = roughly C$ 1.60/share] How aggressive is a pro forma 2016e EV/TTM Sales ratio of 4.1x? Consider industry stalwart Canopy Growth Company. If its sales were to quintuple next year, its 2016e EV/TTM Sales ratio would be about 7.0x **
** See Canopy’s 11/26/15 press release
The truly exciting part of this analysis is that the Company’s prospective valuation per share of C$1.60 is relative to a peer group that has weaker growth potential, lower gross margins and higher debt leverage. In addition, Golden Leaf has a leadership position where first mover advantage is of paramount importance. A possible takeaway is that Golden Leaf’s pro forma, 2016e EV/TTM Sales ratio of 4.1x, could warrant a premium valuation. A 25% premium to the 4.1x multiple equates to a multiple of 5.1x, which would be C$ 1.90/share, double the current price of C$ 0.94. A 50% premium would equate to a share price of C$ 2.30. Make no mistake, this valuation analysis is highly speculative, but since it is a comparison to peers, it’s not unreasonable.
At C$ 0.94 & C$ 2.85, Golden Leaf’s market cap was C$ 58 million, and Canopy Growth’s, C$ 286 million, respectively. Should Golden Leaf be trading at a 80% discount valuation to Canopy? If Golden Leaf’s valuation were to double to C$ 116 million, it would still be trading at a 60% discount, a triple C$174 million, a 40% discount. It appears as if Golden Leaf’s stock price has ample room to run before the Company’s valuation catches up with select Canadian and U.S. peers.
Disclosure:
I, Peter Epstein CFA, MBA, have no prior or existing relationship with Golden Leaf Holdings or its predecessor(s). I have no prior or existing relationship with anyone on the management team or Board of Directors.
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