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Investing in cannabis 🍀

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Cannabis/Marijuana stocks 

Apart from the global dependence shift, there’s more smoke in the global economy as the pot/marijuana trend becomes a highlighted topic among lawmakers. The market globally shows the potential of reaching $31 billion in 2022 and $60 billion by 2026.

As investors search for cannabis stocks, we look into companies expanding in the cannabis market as legislation shows signs of scaling the industry to new highs.

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Labat Africa Limited (LAB)

Labat is one of South Africa's cannabis companies securing deals that will enable it to leverage and grow from the demand for cannabis locally and internationally. In South Africa, the cannabis market (estimated to be R28 billion) is expected to take the economy, and companies that continue to explore the market, to greener pastures🍀. The hemp market in South Africa in 2021 was projected to reach $1.9 billion by 2024 - this according to the African cannabis report, represents 70% of Africans' estimated value.

During the 2020 calendar year, the country drafted and published a bill for public participation. This was later extended in 2022 in order to:

  • Provide for commercial activities in respect of recreational cannabis.
  • Provide for the cultivation, possession and supply of cannabis plants and cannabis by organisations for religious and cultural purposes on behalf of their members.

Not limited to the above, the bill has been published for public participation.

To have a piece of the pie as the South African cannabis market comes into the spotlight, Labat acquired 80% of Sweetwater, a company that has a cannabis cultivation facility in the Eastern Cape of South Africa. Sweetwater is expected to contribute to the secured deals with buyers from "Europe, particularly Switzerland and Germany," the group said. Labat's dual listing in Frankfurt (which commenced in December 2021) continues to expose the group to international buyers and investors of cannabis from South Africa. Reflected in the company's nine-month period that ended in November 2021, Sweetwater had a net asset value of R6.72 million and a net profit (before tax) of R2.45 million.

"The acquisition of the Eastern Cape-based facility provides Labat with additional medical and pharmaceutical infrastructure... and enables Labat to accelerate the delivery on the off-take agreement with a Swiss pharmaceutical group," the group added.

This comes after the company acquired Echo Life, a Miami-based CBD lifestyle brand, plus four other acquisitions.

Labat went further, entering into an agreement with the Centre for Scientific and Industrial Research (CSIR), in which the company said the partnership would fast track the commercialisation and processing of medical cannabis. According to Labat group CEO, Brian van Rooyen: "The partnership is collaborative and serves to benefit both parties. For Labat, the conversion of natural fibre to biopolymer is where the value-add is. We have several confirmed private sector and state-owned enterprises as clients."

Notwithstanding the loss in revenue, profits from operations during the 2022 financial year (FY22) which ended on 31 August 2021, increased to R2.20 million from a loss of R14.57 million from the prior comparative period (PCP). To expand its retail business, the group secured funding valued at R300 million in December 2021.

Labat will be exploring more opportunities to raise capital for its core business which operates within the healthcare space of cannabis, while adding value to the supply chain through plants in South Africa. This may include funds raised through issuing additional shares.

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Canopy Growth Corporation (CGC)

It's time for that Kush 🍀 as America gears up for a green season. This was after the first economical puff which was brought by the UN resolution that declared marijuana as a less dangerous drug for medical use.

In 2022, the US House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement (MORE) bill that legalises the use of cannabis at a federal level. Speaking on the bill, House Judiciary Chairman Jerrold Nadler said: "The policy of arrest, prosecution and incarceration at the federal level has proven both unwise and unjust ... We have treated marijuana as a criminal justice problem for far too long, instead of a matter of personal choice and public health."

In the states where marijuana has been legalised, sales in 2021 increased to $25 billion and are expected to reach $65 billion by 2030. 

Canopy Growth sees this as an opportunity for growth. Before the shift of legislation on cannabis, Canopy acquired MSO Acreage, a company with CBD products; the deal was valued at $3.4 billion - this was followed by another acquisition of Wana, an American cannabis edibles company. The acquisition was $298 million.

"For us, it (the bill) would allow us to bring businesses like Wana and Acreage into our [profit and loss account] and run it more like a consolidated enterprise, which would be super exciting for our investors. It would also show we already have a good, mature, growing US multistate presence," Canopy Growth CEO David Klein said to CNBC.

Noting that the company lost more than 50% of its share value over twelve months, as regulatory uncertainties take an add sand to the growth engine of cannabis stocks. Canopy continues direct funds to expansion related investments to create value in the long term as legalization in states across the U.S. spread like wildfire. The companies' investments are across the U.S. and Canada.

During the third quarter of FY22, the company's net revenue was CA$141 million(Canadian dollar), representing a 7% increase from the previous quarter (Q2 FY22). Despite a loss in net earnings, as the company expands its business value chain and conducted cannabis-related studies; the company saw an improvement of 86%  (to CA$714 million) from the PCP by 31 December 2021 this comes after consumer demand increased during the period, the company's cash and short investment reached CA$1.5 million for the quarter.

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Informed decision

A factor to consider as an investor is what I call the "non-tangible perspective", which looks at the aspects such as branding (how people look at something). For cannabis, education may be required in the short to long term for society to adjust and look at the herb differently.

From the pandemic that highlighted the importance that many countries have to improve healthcare, medical use for cannabis has since then seen a rise in demand; according to market data forecast, the market is expected to reach at least $46 billion by 2027. As more countries legalize the drug, recreational use is among the aspects that may create value for investors in the long term, further affecting projections of the overall market value.

Adding to the above, as cannabis continues to hit the mainstream, we may see more products on the shelves - depending on where the companies are positioned. This may create a profitable environment for investors in the short to long term. capital raised through shares during the period may result in a dilutive event as the companies expand.

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Sources – EasyResearch, Canopy Growth Corporation, Labat Africa Limited, Business Tech, Forbes, CNBC

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Any opinions, news, research, reports, analyses, prices, or other information contained within this research is provided by an employee of EasyEquities an authorised FSP (FSP no 22588) as general market commentary and does not constitute investment advice for the purposes of the Financial Advisory and Intermediary Services Act, 2002. First World Trader (Pty) Ltd t/a EasyEquities (“EasyEquities”) does not warrant the correctness, accuracy, timeliness, reliability or completeness of any information (i) contained within this research and (ii) received from third party data providers. You must rely solely upon your own judgment in all aspects of your investment and/or trading decisions and all investments and/or trades are made at your own risk. EasyEquities (including any of their employees) will not accept any liability for any direct or indirect loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on the market commentary. The content contained within is subject to change at any time without notice.