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Clever Leaves 2Q: Neutraceuticals Up, Preparing For Cannabis Flower Exports From Colombia

The Analyst

Pablo Zuanic from Cantor Fitzgerald maintained an Overweight rating on the multinational cannabis company Clever Leaves Holdings Inc. CLVR CLVRW and lowered its 12-month price target to $4.30 from $4.50 “on slightly reduced estimates.”

The Thesis

Clever released its financial results for the second quarter ended June 30, 2022, revealing revenue increased 27% to $4.7 million compared to $3.7 million in Q2 2021.

Although cannabinoid exports fell 35% sequentially, management kept guidance for the year at $7-12M (on top of $13Mn from the U.S. nutraceuticals piece). According to Zuanic, new distribution agreements, a high THC potency launch in Germany (24%), the start of dry flower exports from Colombia by the fourth quarter, and the firm’s EU GMP permits for the Portugal operation “bode well for 2H22 and beyond.” “We see CY23E exports 3x CY22E levels,” he said.

Zuanic noted the stock is attractively valued in the “pure export” groups (at CY23E 1.6x sales), and commended the firm’s efforts to reduce cash burn to help mitigate financial risks.

The analyst highlighted the potential legalization of cannabis in Colombia, which would benefit cannabis companies such as Clever, which “adds optionality to the investment case (despite the uncertain timeline).

“We also believe the company has flexibility in Germany on the back of five different distribution partnerships as that market moves forward with legalization.”

Sales of $4.7Mn were below Zuanic’s estimate of $5.7Mn and dropped 11% sequentially. Meanwhile, the nutraceuticals piece increased 4% sequentially to $3.36Mn, “with sales in the specialty/channel up, but down in mass retail and to distributors”.

Regarding cannabinoid exports, for the first half of 2022, Israel represented 32%, Brazil 29%, Australia 22% and Germany 17%.

“In order to better manage working capital, and get ready for flower exports from Colombia this 4Q22, the company reduced the harvest (various CBD and lower THC strains) there by 90% YoY in 2Q22; while this is sensible, it resulted in a much higher company-wide cost per gram ($2.26 in 2Q22 vs. $0.35 in 1Q22 and $0.22 in 2Q21),” Zuanic said.

Although net cash (i.e., cash minus financial debt) dropped seq by $5Mn to $17mn, the company managed to pay down its convertible debt.“Operating cash flow for 1H22 of -$19Mn compares with adj EBITDA of -$13Mn.” Adj EBITDA for the qtr was -$6.3Mn, not far from -$6.7Mn in 1Q22.

Outlook: ‘Exports Ramping’

Management kept CY22 guidance, with sales of $20-25Mn (nutraceuticals at ~ $13Mn and cannabinoids at $7-12Mn); adjusted gross margins of 50-55%; negative EBITDA of $20-23Mn and capex of $2-3Mn.

Zuanic said cost-saving actions should result in $2Mn in savings in 2022, and $4Mn annually going forward and reduced the cannabinoid estimates to $9Mn from $11.7Mn given the current pace. However, he foresees several factors that support the thesis of “exports ramping.”

The company expects to begin dry flower exports from Colombia by the fourth quarter of 2022 and is now a fully licensed medical cannabis distributor in Germany, the biggest cannabis market in Europe.

“In Germany, CLVR will launch a 2nd SKU of Iqanna (via Cantourage) with the highest potency in the market; it expects the Portugal facilities post-harvest stage to receive EU GMP certification. CLVR has several pathways to the German market, while also making inroads in Australia/Brazil, and only just starting a promising relationship with the market leader in Israel (Intercure INCR,” Zuanic said. “Although following a B2B strategy, the company is garnering import and distribution agreements in various markets and developing its own brands for finished products.”

Valuation and price target

Factoring in net cash of $17Mn, leases, and deferred taxes Zuanic calculates an EV of $38Mn. He considered the valuation seemingly attractive, “at 1.6x CY22 sales and 0.9x CY23 sales,” and argued that cash burn is the issue.

“Using projected EV, and stripping out nutraceuticals, we calculate the cannabinoid piece is sold at 3.9x CY22E sales and 2.1x CY23E. But even with those adjustments, we find the valuation attractive (vs. high single digits for the export plays in the private market),” Zuanic said. “Assuming a $5Bn market outside NA by 2024E, and conservatively taking a 5% share, this could imply a $100-120Mn revenue base for Clever Leaves (using a 0.4-0.5x wholesale ratio). If so, with an EV of only $33Mn, the company would be trading at a compelling 0.3x its sales base potential (or ~1x target EBITDA),” Zuanic concluded.

Photo by Andy Li on Unsplash

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