Welcome to our Discover Cannabis series, where we publish in-depth research to introduce new cannabis companies to our coverage.
Introduction
Elixinol Global (OTCQX:ELLXF) is an emerging player within the burgeoning CBD industry. Most investors are familiar with the industry incumbents, Charlotte’s Web (OTCQX:CWBHF) and CV Sciences (OTCQB:CVSI). However, Elixinol has performed extremely well in the last 12 months, and we think investors deserve to know about this high potential player.
(All amounts in CAD)
Operations
Elixinol is an Australian company focused on the cannabis industry. The company operates three business segments with two of them focused on consumer products and third being a pharmaceutical company. The pharma division is based in Australia and has not produced any revenue so far, so we will not focus on this segment in this article. We think the two other consumer segments will drive the vast majority of the near-term growth.
The U.S. Hemp CBD Division: The biggest revenue driver for Elixinol is its CBD segment which produces hemp-derived CBD products. While the 2018 Farm Bill legalized hemp, the FDA has been clear that any CBD products marketed as dietary supplements have to be approved by the FDA. For Elixinol, the market is the increasing popular CBD products, including CBD oil, tinctures, capsules, and skincare products. Elixinol sources its hemp from Colorado, and it announced a 50/50 joint venture with a local Colorado farming group to produce organic hemp. It is also expanding its Colorado farming capacity to 20,700 sq ft and will be able to produce 5,000 kg of ethanol-extracted CBD and 3,125 kg of CO2-extracted CBD once completed.
The company currently generates its sales mostly from bulk oil sales and private label sales. However, Elixinol has made a point in its 2018 annual report that it is investing heavily to establish its direct-to-consumer e-commerce channels. It has invested heavily in marketing by placing ads in high-profile locations such as Times Square and collaborating with influencers in sports and health. We think Elixinol is trying to catch up to industry brand leaders Charlotte’s Web and CV Sciences.
(Investor Presentation)
Hemp Foods Australia: The third segment is Elixinol’s hemp foods division which produces hemp-based raw materials and finished products. It is similar to Manitoba Harvest which was acquired by Tilray (NASDAQ:TLRY) for C$419 million in February 2019. This business is also seeing increasing growth in Australia due to increasing consumer interest in hemp-derived food products. We think the company has a first-mover advantage in the Australian market and should focus on expanding national distributions and product innovations.
(Investor Presentation)
Financials
Elixinol was listed in Australia in January 2018 and began its U.S. OTC listing in June 2018. The stock has gone up more than 150% since its debut on the U.S. market driven by favorable industry tailwinds and strong execution. With 125 million shares outstanding, the company currently has a market cap of US$410 million and trades at 14.2x EV/Revenue based on its 2018 revenue of A$37.1 million. In comparison, Charlotte’s Web trades at 25x and CV Sciences trades at 12x. We think Elixinol’s low valuation is partially justified by its hemp food business, as we think investors are likely valuing its CBD business at a much higher multiple than its Australian food division.
(Source: TSX)
Elixinol reported A$37.1 million of revenue in 2018, which increased 121% from 2017 driven by strong growth in the CBD division (87% of the 2018 sales). Bulk and private label accounted for the majority of the CBD sales, but growing direct-to-consumer sales will become the focus for Elixinol this year. Compared to its peers, Elixinol has a much lower gross margin at 54% compared to Charlotte’s Web at 72% and CV Sciences at 66%. While Elixinol does not break out gross margins by division, we think the overall lower margin is likely due to its heavy focus on bulk and private label sales which carry lower margins than direct-to-consumer sales. Also, the Australian food division is also likely generating lower margins than the CBD products.
(Investor Presentation)
Looking Ahead
We think Elixinol is a high-potential name that has multiple catalysts in the near-term. First of all, we think Elixinol’s lack of direct U.S. listing means that it is flying under the radar since it’s listed in the U.S. last June. As more investors get to understand the story and its favorable positioning within the U.S. CBD market, we think there could be increasing interests from U.S. investors. Secondly, the company is already generating substantial sales and reaching profitability, which reduces risks relative to some of the other early-stage cannabis companies. We think Elixinol’s CBD segment should be targeting margins similar to Charlotte’s Web in the long run, which bodes well for profitability after this initial period of heavy investments in marketing and brand-building. Lastly, Elixinol’s valuation is attractive compared to its two closest peers, and we think the stock has exemplified very consistent performance with minimal volatility. We think there are lots of room for growth both operationally and valuation wise, which resulted in our favorable view of Elixinol as a way to gain exposure to the burgeoning CBD industry.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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