17 Feb 2021 BY MICHAEL BERGER
The cannabis industry currently counts over 1,000 publicly listed companies. Consequently, it takes a lot to rise above the noise and stand out. Australis, in our opinion, is one of those companies that is uniquely differentiated, well led and poised to make an impact on the U.S. cannabis industry through a very well differentiated capital-light strategic model. We believe that while Australis shares have performed strongly since a new leadership team took over, the Company’s execution and outlook merit a closer look as we believe there is very considerable upside in this stock.
Australis – poised to capitalize on the U.S. cannabis opportunity
In 2018, Aurora Cannabis Inc. (ACB.TO) (ACB) spun off Australis Capital Inc. (CSE: AUSA) (OTC: AUSAF) as a standalone public company. The rationale for the spinoff was related to the Toronto Stock Exchange’s (TSX) regulations that did not permit TSX listed companies to be engaged in plant touching cannabis operations in the United States (US).
In November 2020, shareholders overwhelmingly voted in favor of replacing the entire board. Since the new leadership team took over, considerable progress has been made towards turning Australis into the company it was always meant to be, a capital-light, multi-state cannabis operator in the U.S. Australis has reported several significant developments that have reignited interest in the stock.
Growth Ahead in US Cannabis Market David can help on this section.
The U.S. legal cannabis sector, already by far the largest in the world, is poised for further tremendous growth. In 2020, Americans spent $18.3 billion on cannabis, up by a staggering $7.6 billion over the prior year (source: leafly.com). This momentum is anticipated to continue, with Cowen & Company projecting around $40 billion in sales by 2025. Adult use cannabis is currently legalized in 15 states plus Washington, D.C., while 36 states have legalized medical cannabis. The November 2020 elections saw five states voting for ballot initiatives to legalize cannabis and the expectation is that the 2022 elections will see a further increase. Market growth is driven by three factors: new states legalizing cannabis, individual consumers increasing their spending on cannabis and new consumers entering the legal market. The latter group includes people migrating from the black to the legal market, but also counts a growing number of new consumers. One demographic driving growth was the so-called Generation Z (generally considered as those born in the early to mid 1990s to the early 2010s). D data firm, Headset, found that from 2019 to 2020, sales to Generation Z consumers increased by 127%, compared to 5% for boomers.
With the Democrats taking the Presidency, the House and the Senate, we believe that important strides towards legalization at the Federal level will be made, which we expect will create growth well beyond the current predictions.
In this market environment with many growth catalysts, the opportunity is immense, and we believe that Australis with its unique model and Tier One management team, is positioned exceptionally well to capitalize on this opportunity and realize outsized growth.
Australis Thesis
From acquiring strategic assets to appointing high-profile executives with a proven track record of value creation in the cannabis industry, Australis has been executing on a capital-light, multi-state growth strategy. We believe the opportunity is flying under the radar. Going forward, we believe Australis is well positioned for growth and are excited about the opportunity for the following reasons:
The additions to the management team that will be effective upon closing of the ALPS transaction are expected to play a key role in the growth of the business and we are favorable on the track record that is associated with these appointments
Australis is highly differentiated from its peers by being very agile with an asset light model that allows it to seize new opportunities quickly and efficiently
The company has announced two acquisitions that will lead to its first significant revenues and positive cash flow
The company is rapidly capitalizing a number of other organic and inorganic growth catalysts with significant upside
Australis is levered to several high-growth newer markets throughout the U.S.
The company has an attractive business model and with favorable synergies between its subsidiaries
The company will be exceptionally well positioned once cannabis becomes federally legal by having a much more efficient capital asset structure without an asset heavy model
At current levels, we believe Australis has a compelling valuation and a favorable risk-reward profile
Announced Significant Additions to the Leadership Team
When we analyze any cannabis company, we initially conduct research on the management team and consider this to be the most important aspect of any cannabis business. During the last quarter, Australis has announced several significant appointments that we rate highly favorable.
We believe the intended appointment of Terry Booth as Chief Executive Officer (CEO) is a transformational development for Australis. Previously, Terry was the CEO and Founder of Aurora Cannabis and is one of the best-known names in the cannabis industry. While serving as CEO of Aurora Cannabis, Terry built a reputation as an executive who is able to lead and motivate teams to execute at a pace much more rapid than we are used to from other companies in the space. He is a consummate company builder who has generated billions in shareholder value. We believe he adds important expertise to the business and are favorable on his appointment.
In late 2020, Australis announced the appointment of Jon Paul as Chief Financial Officer (CFO). Previously, he was CFO at PLUS Products and has approximately 40 years of senior financial experience with both public and private companies. During this time, Jon built a strong track record in leading hypergrowth in fast-paced businesses including the cannabis, consumer goods, wireless telecom and generic pharmaceutical industries. While at PLUS, Jon was a key member of the team that was responsible for a 15-fold increase in revenues. Jon earned an MBA from the Harvard Business School and we are favorable on the experience that he adds to the team.
Interim CEO Dr. Duke Fu, who took the helm in November, is expected to take the role of COO upon Mr. Booth becoming CEO. Dr. Fu, who was President of Medmen in 2014-2015, will focus on driving organic growth, showing how Australis takes a strong team-based approach to creating value. As CEO of GT, which is being acquired, he has a strong track record in developing high-end cannabis designer products. The wisdom of this strategy is clear, considering GT has a 52% penetration rate of the Nevada retail market, limited only by its production capacity. GT products sell out consistently. This, we believe, bodes well for when GT products will be introduced in new jurisdictions through Australis’s capital light expansion model. Dr. Fu has shown a strong ability to deliver value, and we are very bullish on his capabilities to drive strong organic value growth.
Strategic Acquisitions are Expected to be a Major Growth Driver
Australis recently issued a corporate update that highlighted the acquisition of Green Therapeutics, and we are favorable on the growth prospects that are associated with it. The company reported that Green Therapeutics saw a spike in demand for cannabis products in December and we are bullish on this trend. When compared to the same period in 2019, revenue increased by 47% and we will monitor how the operator continues to grow
We consider the December sales data to be significant since GT’s business was negatively impacted by limited production capacity and the COVID pandemic. The growth was fueled by GT’s ability to source more raw material which had attractive economics. Demand for the brand’s cannabis products remains elevated and the company reported that it has been quickly selling out of product.
Like the ALPS transaction, completion of the GT transaction is anticipated to be accretive at the EBITDA level. Furthermore, the Company is in the process of selling a plot of land it is not utilizing, which should generate approximately US$1.95 million upon closing.
We believe that ALPS represents an attractive acquisition target and are favorable on the track record that is associated with the company’s operations and revenue model, which also include a unique recurring revenue based compliance, maintenance and service offering, APIS.
ALPS constructed some of the largest state-of-the-art cannabis facilities on the planet, and we expect the asset to prove to be a major revenue generator for the business. We also expect Australis to find significant synergies from the acquisition as it continues to execute on its growth strategy and believe the market is discounting this aspect of the story.
The projects announced vary in scale and complexity, showing ALPS scale-agnostic approach and resonance with the industry. Trends such as local production, production in unfavorable climates, high-quality and exceptionally low operating costs resonate strongly with current industry dynamics and we believe ALPS is very well positioned to benefit from these dynamics and record strong growth.
ALPS’ ability to execute on the traditional horticulture sector will create a secure and diversified de-risked revenue stream for Australis and we are bullish on this aspect of the story. We expect that the profitable nature of these operations will generate significant cash flow that will support Australis’ cannabis expansion across multiple states.
About Australis Capital
Australis is highly levered to strategic markets in the U.S. The company is executing on a multi-faceted growth strategy and we are favorable on the direction the new management team is executing on. From making strategic investments and acquisitions, the company has enhanced its growth profile and we are bullish on the Company’s unique capital-light expansion strategy.
Australis’ business and assets include investments in Cocoon, Body and Mind Inc., Quality Green, and land assets in Washington and Michigan. The company recently announced the proposed acquisition of Green Therapeutics LLC, a high-end U.S. multi-state-operator (MSO) with operations in Nevada, Missouri, and Oklahoma. Green Therapeutics owns three popular brands, GT Flowers, Tsunami and Provisions. The GT brands are all characterized as high-end and sell out consistently through GT’s 52% penetration of the Nevada retail market. The assets in Missouri and Oklahoma are close to being developed and the Company anticipates operationalizing these in the coming quarters.
Australis also recently announced the acquisition of a 51% interest in ALPS (with a compellingly priced option to acquire the remaining 49%), which includes a leading cannabis brand, Mr. Natural. We expect the acquisition of ALPS to play a key role in the growth of the business and consider it to be a core pillar of the business.
ALPS is a leading design, construction management, commissioning and post commissioning consultancy company for horticultural crops (i.e. cannabis, fruits, vegetables, mushrooms, and algae). ALPS has been executing rapidly on various global opportunities and is expected to be the gateway for Australis to secure low-cost take off agreements in multiple jurisdictions for Australis to scale up its brands across the U.S.
Through its core business, ALPS brings considerable revenue to Australis, with numerous catalysts identified for rapid growth. Its standing within the cannabis industry as the brand of choice for the delivery of facilities that produce high-end cannabis at very low cost is key to both ALPS’ growth prospects in this sector, and the execution of the capital-light strategy Australis is implementing. In the past month, ALPS has announced four new projects with a total revenue value in excess of $5 million. Furthermore, ALPS has a significant pipeline of new potential clients and we anticipate a consistently strong and profitable growth profile.
We are favorable on the potential synergies that are associated with ALPS and believe that the market is discounting this aspect of the story.
The company expects to complete these acquisitions shortly, and we believe completion will prove to be a significant catalyst for the stock.
A Differentiated Growth Story
Through these acquisitions and the strategy execution it enables, Australis represents a highly differentiated growth opportunity. We believe the management team’s ability to execute on this strategy leaves the business well positioned for growth over the long-term and believe that our readers need to be aware of this.
An Opportunity that is Trading at a Discount
During the last quarter, Australis has reported several transformational developments and we are favorable on how the business has advanced. At current levels, the company is trading at a considerable discount to its peers and we believe that it has a compelling valuation.
We believe Australis has a favorable risk-reward profile and significant potential catalysts for growth. As the company continues to execute on key growth projects, we expect to see analysts become more bullish on the opportunity.
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