Aleafia Health is a cannabis winner, says Raymond James

Raymond James analyst Rahul Sarugaser likes the way Aleafia Health (Aleafia Health Stock Quote, Chart, News, Analysts, Financials TSX:AH) is developing, saying in a company brief to clients on Wednesday that investors should see some better days ahead for both the company and stock.

Ontario-based Aleafia Health is a licensed producer of medical and rec cannabis, a provider of direct-to-consumer cannabis delivery and the largest provider of cannabis health services in the country. Aleafia has secured agreements with some of Canada’s largest unions and employers on insured medical cannabis services, including Unifor, the country’s largest private-sector union.

In his report, Sarugaser commented on a flurry of recent announcements from Aleafia, starting on June 3 with the company’s first medical cannabis export to Germany. Aleafia sent dried flower grown at its Niagara greenhouse including the company’s THC cultivar Sour Kush and represented a milestone for the company in entering the German legal cannabis market.

“This is AH’s second major international export market, after Australia,” Sarugaser wrote. “AH indicates that it will make two further shipments to Australia in the near and medium-term, the first of which should ship in June.”

On June 10, Aleafia launched four new large format products under its “everyday cannabis” brand Divvy. Coming in 14-gram pouches and a ten-gram pre-milled flower offering in the dried flower and pre-roll categories. On the Divvy launch, Sarugaser said AH’s low-cost cultivation at its Niagara greenhouse and Port Perry outdoor grow should give the company a material cost-of-goods-sold advantage relative to most of its peers in the value segment of the cannabis market.

Then on June 14, Aleafia launched a peppermint-scented CBD roll-on product for the company’s Noon & Night brand of wellness products, followed on June 15 with the announcement that it had largely completed planting on its 86-acre site in Port Perry, Ontario, expanding on last year’s plant which produced 31,200 kg of dried flower at a cash cost to harvest of $0.10 per gram.

“Through the tremendous diligence and hard work of our operations team, we are poised to take another major step forward this year in outdoor cultivation. With all infrastructure completed and licences secured last year, Port Perry has become a highly advanced, year-round operation that we expect to deliver major improvements in our total yield,” said Aleafia Health CEO Geoffrey Benic in a press release.

On the Port Perry grow, Sarugaser said, “The outdoor harvest empowers AH’s adult-use consumer brands such as Divvy, with its large-format value cannabis flower offerings and serves as input material for AH’s adult-use derivative products and its CBD-focused wellness line of products (e.g. Noon & Night).”

Sarugaser said all of the above events help demonstrate how Aleafia is making progress toward its strategic targets. Looking at the adult-use market, Sarugaser said AH showed over 70 per cent sequential revenue growth in the adult-use channel in the month of May, a sign that the company’s escalation of SKUs for the rec market is beginning to pay off by winning market share.

On the medical services front, Sarugaser said he expects to see small contributions during the current second quarter from the company’s exclusive agreement with Unifor, with business ramping up over the second half of the year. The analyst noted that Ford Motor Company was the first major employer to ratify a medical cannabis program for its employees, with participation recently commencing, while Sarugaser sees General Motors as likely among the next to initiate participation.

With the update, Sarugaser reasserted his “Outperform 2” rating for Aleafia, while looking ahead, the analyst is calling for AH to generate 2021 and 2022 revenue of $64 million and $102 million, respectively, and 2021 and 2022 EBITDA of $3 million and $10 million, respectively.

“AH’s positive adult-use sales data, combined with its typically large, seasonal LP-to-LP sales yielded from outdoor harvests, combined with its steadily ramping Canadian medical cannabis revenues, combined with solid progress with international medical cannabis exports, makes us optimistic about AH’s stock during the quarters to come. In our view, AH is on its way up,” Sarugaser said.

Aleafia last reported its financials in mid-May, where a drop in the company’s domestic wholesale business saw overall revenue fall from $13.7 million a year ago to $6.2 million for the first quarter 2021. By segment, net medical cannabis revenue up 95 per cent year-over-year to $2.7 million, net adult-use cannabis was up 143 per cent to $1.7 million and net bulk wholesale revenue was down 84 per cent to $1.9 million.

“To further leverage product portfolio expansion, we have only just begun the deployment of our highly differentiated medical cannabis ecosystem through the trailblazing exclusive agreement with Unifor, Canada’s largest private sector union,” said Benic in a press release.

“The ability to service a captive audience of union members who receive insurance coverage for medical cannabis is an important catalyst. We believe that this sets the table for a strong 2021, driven by repeatable, profitable sales in the medical, adult-use and international markets,” he said.