Aleafia Health

Aleafia Health (TSX: AH) is a vertically integrated and federally licensed Canadian cannabis company which offers cannabis health and wellness services and products in Canada.

Key Updates:

• Improved traction from the adult-use segment: The adult-use segment saw a tremendous surge in the recent past, supported by robust demand dynamics from its everyday cannabis brand Divvy coupled with several new launches of several medical products such as Black Widow CBD 14g Dried Flower and FLO 14g Dried Flower. Notably, the above products reported a solid response from the consumers, which has resulted in a ~57% q-o-q increase in revenue from the above segment. We expect the above trend to continue in the coming days, which would subsequently lead to improved performance.

• Update on outdoor harvest: During Q3FY21, the group completed the harvesting of its FY21 outdoor cannabis facility in Port Perry. Additionally, the company reported Testing and weighing of CBD-dominant CBD/THC balanced cultivars. As per the preliminary test results of THC dominant dried flower, the result indicates a significant improvement in potency, and total kilograms harvested that can be made available to sell in the adult-use market in pre-roll and milled formats. The above improvement was driven by improved R&D activity done in FY20. Notably, the above is expected to result in improved yield and subsequently boost the company’s overall efficiency.

• Lower total debt: The company reported a lower total debt of CAD 47.2 million in Q3FY21, as compared to CAD 60 million in Q4FY21. A decline in debt level is a key positive and indicates higher financial flexibility.

Q3FY21 Financial Highlights:

• AH announced its quarterly results, wherein the company posted net revenue of CAD 9.581 million, which climbed from CAD 4.968 million in the previous corresponding period (pcp). The surge was driven by strong demand from the Adult-use Cannabis segment.
• Gross loss lowered at CAD 0.098 million, as compared to a loss of CAD 10.253 million in pcp, thanks to the elevated revenue, partially offset by higher cost of sales.
• The quarter witnessed lower general & administrative costs, while a rise in wages & benefits expenses coupled with a significant surge in bad debt expense acted as a drag.
• Net loss stood at CAD 82.922 million, as compared to a net loss of CAD 19.761 million in pcp.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risk: The company witnessed a rise in the increased costs, which has resulted in the suppressed bottom line. Hence, a continuation of the above trend would lead to a decline in profitability and cash flows.  

Valuation Methodology (Illustrative): EV to Sales based

Stock Recommendation:

The adult-use segment contributed ~53% of the total revenue in Q3FY21, significantly higher than ~9% in pcp, which indicates strong consumer feedback. We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like New Frontier Health Corp, Auxly Cannabis Group Inc etc. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 0.125 at 10.05 AM Toronto time on December 20, 2021.

One-Year Technical Price Chart (as on December 20, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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