Cannabis company Sunniva Inc. (CSE:SNN) has announced its intention to spin out its Canadian assets to list on the TSX and the Nasdaq and to leave its US assets to trade on the CSE. Analyst Doug Cooper of Beacon Securities calls the move a great value creation play which will further the company’s M&A strategy in California.
Sunniva is currently in the middle of constructing a 489,000 sq. ft. facility in Cathedral City, California, which is projected to produce up to 160,000 kg of cannabis annually (scheduled to be fully operational in Q3/18), while in Canada, Sunniva is in the early stages of building a 100,000 kg facility in Okanagan Falls, BC.
The California facility intends for 30 per cent of its product to be used for higher margin extracted products, a value-added strategy which Cooper says could generate over US$500 in revenue at a 30 per cent EBTIDA margin for Sunniva.
In Canada, Sunniva has signed a two-year contract with industry-leading Canopy Growth Corp. for 45 per cent of its BC production, which Cooper says implies a cash flow of $270 million, more than the current market cap of the company itself. The company also operates a network of seven medical cannabis clinics in Canada under the name Natural Health Service.
All told, Cooper says there’s a lot of undiscovered value in Sunnia.
“We believe having unencumbered US assets is very important and frees up the company to aggressively pursue an M&A strategy within the largest cannabis market in the world (California),” the analyst said in an update to clients on Tuesday. “SNN has a current EV of ~$220 million, which neither reflects the true value of the US nor Canadian assets.”
As for the prospects of the intended spinoff, CEO Dr. Anthony Holler is optimistic.
“Creating a new Canadian company with our Canadian assets and listing them on the TSX and NASDAQ would be expected to bring added visibility and additional analyst coverage to our story and has the potential to attract institutional investors that are currently unable to purchase stock on the CSE or purchase companies holding US assets.”
In his Tuesday update, Cooper reiterated his “Speculative Buy” rating and $16.50 target price for SNN, representing a potential return of 105 per cent at the time of publication.