Tilray, Ayurcann, Aurora Cannabis, Canopy Growth - Sow first, then reap

Canada as legalization pioneer

While Scholz, Habeck and Lindner are negotiating the next steps regarding the legalization of cannabis, among other things, during talks on the traffic light coalition, the intoxicant has already been legal in Canada since 2018. Even before legalization, Canada was the country with the most cannabis users in the world. A quarter of the population regularly consumes hashish, marijuana or cannabis-infused edibles recreationally or for medical reasons. According to Stats Canada and Equity Research, the Canadian legal cannabis market was worth USD 3.1 billion in 2020 and is expected to triple to USD 10.1 billion by 2025. The global legal cannabis market is expected to grow up to USD 66.3 billion during the same period.

The reasons for the vast growth rates can be explained in the broader product range. In 2018, legal consumption was limited only to flowers, oils, plants and seeds. A year later, Cannabis 2.0. took the next step and expanded for over-the-counter marijuana to include cannabis derivatives, including beverages, edibles, e-cigarettes, and so-called vapes. With the emerging third wave, the billion-dollar healthcare sector, in particular, is now to be fed with cannabis products. Here, bath products, skincare creams and lotions, and ointments are increasingly hitting store shelves.

White label the solution

For smaller cannabis companies, the expansion of the product range is becoming an ever-greater challenge and cannot be managed alone for reasons of cost, capacity and licensing. White labeling, which is becoming more prevalent in the industry, allows companies to focus on establishing their brand and accelerating the expansion of their product line without investing in infrastructure, processing labs, and production facilities required to manufacture these products.

The manufacturing of each product will be handled by one of the leading B2B post-harvest solutions providers, Ayurcann, which focuses on providing scalable custom processes and pharmaceutical-grade products to Canada's recreational and medical cannabis industries. In doing so, customers can choose from 40 products ranging from creams to vape pens to balms developed by Ayurcann and bring them to market under their brand. It is subject to a flat fee or a percentage of product sales. More than 20 customers are currently using the white-label services, including the Israeli companies Bazelet, Fuego and Vida or the US company Green Bee, which specializes in women's products.

Enormous potential

In doing so, the Ontario-based licensed cannabis extraction company is focused on the Canadian market. It is seeking strategic partnerships with international brands to help them distribute in the North American country. The Company's operations are close to more than 200 cannabis producers, allowing for efficient product transportation. The Company has a 10,845-square-foot facility used for co-packing, white labeling and high-purity extract processing, and the production of proprietary oil distillates for Cannabis 2.0 and 3.0 products. The production capacity is 200,000 kg of biomass per year and is planned to be expanded to 300,000 kg due to increasing demand, which corresponds to 30,000 kg of distillate production.

Figures inspire

The quarterly figures of the debt-free Company already show the significant economies of scale. Net sales for the third quarter of 2021 increased 67% quarter-on-quarter to USD 2.6 million, with an adjusted EBITDA of USD 1.1 million. Sales of the Company's oil distillates were the primary revenue driver, accounting for 84% of the total with a gross margin of around 35%. In comparison, the fast-growing white label business contributed 16% of revenue with a margin of 60%. Further increases are expected in the fourth quarter. Ayurcann's stock price in Frankfurt is currently EUR 0.12. The analyst firm Fundamental Research Corp. sees the Company as a buy candidate with a price target of the equivalent of EUR 0.49.

Anticyclical positioning

Despite a brief flare-up of euphoria and sharply rising prices, the price increases were used again to sell-off at the end of the week in cannabis stocks. The market is currently not yet at the end of the correction. In the long term, the segment should again be one of the winners. Due to this, the current correction offers an anti-cyclical entry in the big players such as Canopy Growth, Tilray and Aurora Cannabis. For all three stocks, the setback potential is between 10 and 15%.

With legalization plans in several states and the expansion of products to Cannabis 3.0. the industry should face a prosperous future in the long run. In addition to the Big Three mentioned above, Ayurcann is attractive due to its market leadership in white label solutions.