eResearch is pleased to publish a Company Report on Nextleaf Solutions Ltd.(CSE:OILS). You can download the full 9-page Company report by clicking here: eR-Nextleaf-CSE-OILS-2020-04-05-CR-FINAL
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COMPANY DESCRIPTION:
Nextleaf Solutions Ltd. is a Canadian extraction technology company that has developed a portfolio of issued and pending patents. These patents pertain to the Company’s unique industrial-scale process of producing purified cannabinoid distillate, a tasteless, odourless cannabis concentrate best suited for infusing premium value-added products. The Company’s industrial-scale processing facility, Nextleaf Labs Ltd., is located in Coquitlam, B.C. Based on one shift per day, Nextleaf has the design capacity to process 600 kg per day of dried cannabis biomass into distilled oils.
COMPANY UPDATE:
First Commercial Tolling Contract: Nextleaf Signs Cannabis Extraction Agreement with Private Grower
IMPACT: Very Positive
- Nextleaf Labs expects to process 15 tonnes of cannabis biomass into distilled THC and CBD oils for a privately owned licensed producer.
- The licensed producer operations are in Ontario, out of a 10-acre greenhouse.
- The initial term is for 12 months or earlier. After processing the 15 tonnes of biomass, the agreement automatically renews.
- This contract represents only 7.5% of the Company’s annual capacity.
TAKEAWAYS:
- Management expects the contract to generate up to $16M in revenue over the next 12 months, implying a price of $1.07/gram. We assume the cannabinoid content of the supply biomass is likely within a range of 4-6%.
- We fundamentally believe that Nextleaf secured this contract because of the Company’s ability to process at scale and at a lower price point than its competitors. OILS can process the 15 tonnes of biomass in 75 days using one shift. In comparison, processors using C02 would require eight machines to achieve the same throughput at higher costs (not scalable).
- Combined with the royalty license agreement announced in Dec. 2019, these two contracts represent $18M in revenue potential. This does not include any other new revenue, which is highly likely. We estimate that OILS trades at 0.7x 2020 EV/Revenue compared to extraction peers at 1.1x.
FINANCIAL ANALYSIS:
- The timing and size of this contract is ahead of our expectations. However, our recommendation and target price are pending as we are in the process of transferring coverage to eResearch. For reference, stated below are our sales and EBITDA estimates for the next two years.
- F2020: Revenue $35.8 million; EBITDA $1.1 million
- F2021: Revenue $119.4 million; EBITDA $49.0 million
- Based on our previously published estimates, OILS now trades at 0.2x 2021 EV/Revenue and 0.4x EV/EBITDA, respectively, versus extraction comps at 0.7x 2021 EV/Revenue and 2.4x 2021 EV/EBITDA (see Appendix A).
- Recent share price weakness not justified. We believe Nextleaf’s share price weakness over the past few months was driven by several factors. The first factor was a sector-wide selling correction caused by poor financials, layoffs, and bankruptcies. This was then followed by a black swan event, the Covid-19 pandemic, that drastically reduced global supply and demand, and sunk the S&P 500 by 17%,TSX by 21% and Nextleaf by 20% in the past month (see Appendix B).
- Companies with strong fundamentals were affected regardless of what segment of the cannabis market they operated in. To illustrate, we have US and Canadian publicly traded sample sets in Appendix A. Year-to-date, both sample sets are down 42% and 41%, respectively. We estimate that over the next few months, as retailers and consumers’ interest in Cannabis 2.0 spark up, and negative commentary falters, the whole space should benefit. In addition, companies focused on extraction like MediPharm Labs, Valens, and Nextleaf will continue to report strong cash flowing quarters, and fundamentals will begin to lead the way.
DIAGRAM 1: Nextleaf’s Extraction Process
