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Most of the marijuana investor’s focus is on Canada and California. This makes sense because they are the world’s two largest leisure (or imminent) cannabis markets. However, a listed company with a U.S.-centric cannabis business has taken a different approach. iAnthus Capital is listed on Canada’s CSE (OTCQB: ITHUF) but is headquartered in New York and incorporated in Delaware. Unlike other Canadian-listed cannabis companies, most of them are committed to joining the highly competitive green channels in California and Canada, and iAnthus has turned its sights on becoming the dominant company on the East Coast of the United States.
iAnthus’ strategy is to build vertically integrated cannabis portfolios in markets with severe barriers to entry, namely a limited number of permits. Although both Canada and California have larger market sizes than other single state markets in the United States, the barriers to entry are low, so the share of growers and operators is significantly higher. Coupled with the fact that California and Canada are known for their expertise in cannabis cultivation, it has led to fears that most profits will be competing for market share in a highly competitive environment. On the other hand, the number of competitors in the East Coast market, where iAnthus’s core assets are located, is limited, and the combined population size is significantly larger than California and Canada.
They are currently doing business in six states and are looking at further expansion. Initially, they intended to be strictly speaking an investment company. It would operate under the patent royalties model, but concluded that buying strategic assets directly in a market with limited competition can yield better returns. Their investment portfolio includes strategic partners and minority investments, and they own 100% of the equity or have a majority stake in the core assets and may choose to purchase the remaining equity. Most of the value lies within the core assets of the East Coast, but they also made some noteworthy investments in Colorado and New Mexico.
Renault Greenleaf & Associates manages three LNPPs (licensed non-profit producers) and a processing facility in New Mexico. They generate revenue through management contracts, financing, consulting, and real estate and equipment leasing. iAnthus owns 24% of the company’s shares. Through its partnership with them, it manages four licenses, including six pharmacies, two pharmacies, a manufacturing/processing facility and three planting facilities.
Organix is a pharmacy in Breckenridge, Colorado. They also operate a 12,000 square foot breeding center in Denver. iAnthus owns all of the company’s non-marijuana assets, including all real estate, equipment and intellectual property.
TGS is one of the largest pharmacy operators in Colorado and is also the winner of over 50 hemp industry awards. They currently operate 13 pharmacies and plan to open two more. iAnthus has reached a strategic partnership with them and provided them with a $7.5 million loan year.
In January of this year, iAnthus acquired $30.5 million in cash and US$17.5 million in cash and iAnthus at a price of US$2.52 per share and acquired a wholly-owned subsidiary of Grow Healthy Holdings, LLC, including Sunny Hill Nursery and GHIAA Management, wholly-owned subsidiaries of McCrory. The total purchase price is 48 million US dollars. Grow Healthy has one of 13 licenses throughout Florida, allowing them to enter major markets in the United States (21 million people) with very limited competition. The growth of health assets includes a 200,000-square-foot planting and processing center in Lake Wells on the 33-acre campus that will produce 18,000 kilograms per year after completion. They currently have at least 4,000 square feet of production facilities and 15,000 square feet of extraction laboratories and commercial kitchens. It also includes the right to open 25 pharmacies throughout the state and provide medical marijuana throughout the state.
They are currently preparing to open their flagship pharmacy in West Palm Beach, another in Tampa and another in Orlando scheduled to open in the fourth quarter. They have already provided marijuana to patients in Florida through a delivery service, three of which are operational and plan to operate eight vehicles throughout the state by the end of the year.
In addition to gaining control of excellent physical assets and licenses, the Grow Healthy acquisition also has excellent management. From their investor platform:
Citiva New York
In February of this year, iAnthus acquired Citiva 100% with US$18 million (USD) US$1 million in cash, and the remaining US$14.4 million worth of iAnthus was US$2.57 per share. Citiva has only one of 10 licenses in New York State, including a planting and processing facility and four pharmacies. New York has a population of about 20 million, while Brooklyn (the seat of Citiva’s flagship pharmacy is expected to open before the end of the year) has only 2.6 residents, of which Citiva will have only one other competitor. They also plan to open another pharmacy in Staten Island in the fourth quarter and will become the only licensed pharmacy on the island’s 500,000 residents. In addition, they will open two pharmacies in the Dutchess (population 300,000) and Chemung (population 70,000) counties early next year. In addition, they plan to launch home delivery services in the fourth quarter of this year.
Iguogus is expected to complete the acquisition of 8.2 acres of land in Orange County, New York, and will immediately start building its planting facilities. They expect the first phase of the expansion project to be completed in February 2019. It is expected that the annual production will be approximately 1,470 kg/year, and the entire plant will be completed in the first quarter of 2021 with an annual production capacity of 22,000 kg/year. At the same time, they are negotiating wholesale supply agreements with other manufacturers to meet the demand for pharmacies that will open in the fourth quarter.
Again, like the Florida acquisition, iAnthus was impressed with Citiva’s management. Citiva’s management has experience in growing and operating a multi-million dollar business. From their acquisition overview:
In January, iAnthus completed the acquisition of 80% of Pilgrim Petroleum Management LLC, which oversees May Flower’s operations and owns all intellectual property, real estate and equipment (usually in the United States, pharmacy and cultivation. Workers must be non-profit so that there is usually a profit management company that oversees operations and makes a substantial profit of $11.7 million. They can also choose to get the remaining 20% when Mayflower applies for one or more additional cannabis licenses.
Mayflower Medicinals opened a medical clinic in one of Boston’s main neighborhoods. It is one of the only three licensed pharmacies in the city, with 670,000 residents and 150,000 university students, and is one of about 35 licenses in the state. They are preparing to launch two other pharmacies and, like New York and Florida, allow home delivery. Mayflower has a 36,000-square-foot planting center and is expected to harvest the first crop in April. iAnthus expects Mayflower to produce about 500 pounds per month, or about 2,720 kilograms per year. However, the most attractive aspect of this core asset may be the adoption of recreational marijuana law in Massachusetts, which is expected to launch in the third quarter of this year and will reach $1.2 billion in annual sales by 2020. Mayflower is also being rolled out with other operators to get wholesale marijuana acceleration.
Like other states, iAnthus has a 100% for-profit management company that oversees the operation of Grassroots Vermont, a non-profit cannabis company. They also provide credit services to the grassroots. Grassroots owns and operates a boutique clinic and produces 6,900 square feet of crafts in Brandon, Vermont. They also provide home delivery.
The Vermont market is far smaller than other markets operated by iAnthus and currently only allows medical cannabis to be distributed from retail outlets. However, Grassroots’ annual sales increased 48% year-on-year, and its facility is undergoing a $200,000 upgrade, while the Vermont State legislature recently passed a recreational marijuana law. Unfortunately, the bill does not allow adults to use retail sales, but given that the state legislature has been studying the potential revenue from recreational sales, iAnthus expects this to change in the future.
All of this has been taken into account. Given their portfolio and expansion plans, their current valuation looks very attractive, at least relative to their peers. At the time of writing, the price of iAnthus in the United States is $2.48, and in Canada, the price is $3.14 (code IAN). Its fully diluted shares were 78.64 million shares. The following is their share structure:
Chief executive officer Hadley Ford recently accepted an interview with The Midas Letter, stating that EBITDA margins in the 30s to 30s remain unchanged due to lack of competition and full vertical integration of the company in the markets in which it operates. Usually I will reduce the profit rate predicted by the enterprise. They are often too optimistic, especially in the cannabis industry. However, due to the reasons stated in the interview, I think this is actually a very conservative prediction that is suitable for the modeling of iAnthus benefits in the coming years.
The company expects revenue in 2018 will reach 20-30 million US dollars, 2019 revenue will grow at least 3-4 times. From then on, by 2020, when more pharmacies open up and their planting facilities are complete, revenues may reach 300 to 400 million U.S. dollars. In 2021 and beyond, when they operated 41 pharmacies, they continued to add new sources of income and incomes in excess of 500 million U.S. dollars should be reached.
At the time of writing, the average selling price for cannabis producers in Canada was 40 (Aurora: 33; Canopy: 65; Aphria: 28.5; MedReleaf: 35). Taking into account the vertical integration and lack of competition of iAnthus, their profit margins should be significantly better than these companies. However, because they have a greater legal risk in the United States, we will reduce it by half. Assume that the low end of expected income in 2018 is 20 million U.S. dollars and the P/S is 20, then we value 400 million U.S. dollars, giving us a one-year price target of 5 U.S. dollars per share.
Assuming they continue to implement their business plans and operate all the facilities they legally own, we should see something similar to the one described in the previous section, resulting in a valuation of at least $1 billion over 3 years, giving us a goal of at least 3 years The price is 12-15 US dollars / share. Despite the fact that if they are executing, continue to obtain assets and maintain their profitability, then they may be far higher than this, because they will create excellent returns and growth rates of more than 100%, guaranteeing high multiples.
One of the biggest concerns of the publicly traded marijuana companies is the constant dilution. There appears to be a series of never-ending deals in this industry, and companies do not seem to use the cash for large-scale use. You can say that some of the industry’s management teams are overly focused on raising cash and issuing press releases rather than focusing on creating true shareholder value by strategically positioning their companies for a real competitive advantage.
So far, iAnthus has been a good steward of investor funds, but acquisitions will increase earnings. In fact, their market value with a fully diluted US market value of $195,027,200 and $246,929,600 seems to indicate that their value is at least significantly lower than their counterparts. Despite the fact that they are likely to have no profitable or disposable market forever, this is comparable to what we should see from iAnthus’s east coast operations, but there are many companies in the industry with larger market caps.
This is where investment bankers seem to have great value at the helm. After all, fans are not marijuana producers but they themselves. They are more like an investment company or holding company, and their acquisitions will create value for shareholders. Typically, marijuana companies appear to be raising funds and making acquisitions to avoid falling behind the curve and seem to be doing something. For iAnthus, this does not seem to be the case. He seems to be more cautious about raising cash and will use it only when excellent opportunities arise. This means that if they continue to grow and fund their operations, they will assume additional debt and issue more equity. However, so far they have been able to create a very large presence on the East Coast of the United States without diluting equity to hundreds of millions of shares or overwhelming corporate debt.
Looking ahead, there will be some catalysts in the next two years that may stimulate iAnthus’ share price. They will open several pharmacies in New York State, Florida, and Massachusetts, begin and complete their facilities, harvest their first crops, and add more vehicles to their transport fleets. In addition, Massachusetts’s upcoming entertainment sales business may be exciting for investors. Not to mention, whether it’s Florida or New York, let alone both decided to legalize recreational marijuana in the not-too-distant future, iAnthus’s earnings will be huge.
Risks and concerns
Taking into account all the above information, iAnthus Capital looks cheap. What is it then? First of all, what they operate in the United States is marijuana – medical or otherwise – illegal at the federal level. Earlier this year, U.S. Attorney General Jeff Sessions poured cold water over the fire until early this year, Eileen, in fact, the entire department suffered tears. He canceled the Cole memo – this is a guideline for the Obama era, as long as they comply with state law, it can prevent federal prosecutors against marijuana companies. This brought great fear and uncertainty to the industry and began to correct it immediately. Despite acknowledging that the industry looks very expensive, it may be due to a callback anyway. Here, a few months later, the U.S. Congress once again placed the protection of medical marijuana companies on the budget. However, it does not protect the entertainment business.
At this point, the federal strike seemed unlikely because Sessions did not act against the industry and did not provide any indication of an imminent arrival. According to many political experts, Sessions may become the next dismissed member of the Trump Cabinet – this will be another excellent catalyst for the sector. Even so, this is the real risk that investors must be aware of, and it seems to be reflected in the stock prices of the entire asset class company in the United States. Even if there is no legal action, the uncertainty alone may still be in the industry like a black cloud, leaving many investors overwhelmed.
In the United States, marijuana is legal, or at least completely free from federal intrusion, and the iAnthus transaction may be much higher than it is today. At the same time, is it legal at the federal level and competition from other manufacturers and investors chasing transactions may become a problem for the iAnthus business model.
Another issue investors should pay attention to is that although iAnthus does not have large amounts of debt and dilution (at least relative to the majority of the industry), it still needs more cash to continue its expansion plan, allowing any new transaction to appear on its own . There is a risk in the entire industry that companies will spend a lot of cash to build infrastructure (and dilute equity and take on debt in the process) just to see the profits being contested. Fortunately, iAnthus’ business positioning allows them to lay a solid foundation before the market submerges, and vertical integration should allow them to maintain a good profit margin.
Although they have created a strong strategic position by entering markets that hinder competition, they are about to come when the level of competition in these markets is higher than they are today. If Florida and New York adopt the entertaining cannabis method (in my opinion, the issue is more of a matter of time), they are likely to allow many new entrants to enter the market. This means that pharmacies with prosperous medical cannabis and well-positioned pharmacies should give them a first-mover advantage. They may consider continuing to increase the production capacity of these countries before any expected change in the law, in order to make better use of the advantages of market expansion before new entrants inflow.
All in all, fan capital has done a great job of establishing a strategic multinational presence and may turn into a competitive advantage. Their acquisition is smart, they have managed to implement them without having to give up the farm, so to speak. They have excellent management, excellent assets and a strong business model. The full vertical integration they enjoy in their markets will allow them to weather the final storm of competition, which will put pressure on margins and be better than most. The combination of great entrepreneurs and investment bankers at the helm is convincing and provides a degree of business confidence. However, the fact that they are operating in the United States adds additional risks and uncertainties. Having said that, they have made substantial discounts with many of their peers in the industry and may not maintain such a long time without a federal crackdown. For investors who have a risk tolerance for cannabis assets in the United States, iAnthus Capital is a strong buy at the current level. One-year price target: a minimum of 5-6 US dollars.