Although we are still only in the first quarter of 2021, the number of reported acquisitions in the cannabis industry has already significantly surpassed the activity we saw in the first half of 2020.
During the last month, we conducted significant due diligence on several leading cannabis companies that announced or completed strategic acquisitions in the past twelve months in order better to understand the direction the cannabis sector is heading.
The way the market is valuing cannabis stocks has continuously evolved over the past few years as this nascent industry with a revolutionary past founds its way. The smart companies took advantage of what the market was asking for, raised funds at extraordinary levels, used equity to fund M&A, and deployed cash for growth opportunities. We have also seen companies establish leading global footprints. Aa the dust settled after what could be described as the first inning, those that focused on quality, critical mass and scale presently boast the highest valuations in the global cannabis space. Lessons learned by the executives of the early entrants are a powerful tool for the next 8 innings.
Since these early days, we have seen the focus shift towards brands, U.S. retail, international markets, and technology platforms. We have been analyzing companies that are levered to these aspects of the value chain and have identified a number of opportunities that we consider undervalued and flying under the radar.
Australis Capital Inc. (CSE: AUSA) (OTC: AUSAF) is a cannabis operator that we are particularly excited about and that we believe our readers should be aware of. Australis recently has reported a number of transformational developments, and we are bullish on the risk-reward profile that is associated with these. Through a series of strategic investments and acquisitions, Australis has enhanced its growth profile, and we are bullish on its investment in ALPS.
In January, Australis announced that it would acquire 51% of ALPS and was granted an option to acquire the remaining 49%, and the company announced the completion of the definitive agreement on February 22. We expect the acquisition of ALPS will be immediately accretive to the business and consider it to be a key enabler of the Australis’s unique strategy. ALPS is a leading design, construction management, commissioning and post commissioning consultancy company for cannabis and traditional horticultural crops (e.g. fruits, vegetables, mushrooms, and algae).
While it is unusual for a cannabis company to be invested this deeply into the cultivation value chain, ownership of ALPS provides AUSA with access to the ALPS customer base. It is the company’s strategy to secure, through ALPS, low-cost access to high-quality biomass, on which we will say more later.
ALPS will be a Pillar of Growth for Australis
The start has been impressive. Since the intention to acquire ALPS was first announced, four newly signed projects were announced with a combined contract value of more than $5 million. This is on top of a number of existing clients, and we believe that ALPS has an attractive pipeline of new potential clients. We expect this vertical of the business to have a consistently strong and profitable growth profile.
Going forward, we are excited about the investment in ALPS for a variety of reasons and want to highlight the reasons we find to be the most compelling:
- The amount of human capital that is associated with the business is significant and we are favorable on the additions from ALPS’ to the Australis management team, in particular cannabis industry visionary and pioneer Terry Booth, who will take over as CEO of Australis, and Thomas Larssen, President of ALPS.
- ALPS will allow Australis to execute on a capital light expansion strategy
- 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.
- ALPS represents Australis’ first step toward becoming a leading multi-state operator in the U.S., shortly to be followed by the completion of the Green Therapeutics acquisition.
Of these reasons, we are most excited about the amount of value that is associated with a capital light expansion. Through ALPS, the company plans to enter into streaming deals with a facility client. Under these types of agreements, Australis will have facilities growing its cultivars as part of an exchange of intellectual property (IP).
In return, the facility will sell the cannabis flower to Australis at low cost and we are favorable on this strategy. While there are other companies out there that use third party flower and trim as an input for the manufacture of their products, these companies generally pay the full wholesale price. AUSA, we believe, will be able to secure its biomass at a much more advantageous pricing profile. Through this strategy, Australis can scale the production of its brands across the US without having to invest hundreds of millions of dollars in constructing buildings and purchasing the necessary infrastructure
We consider Australis to be a differentiated opportunity and are favorable on the avenues that it has for growth. The company has developed a multi-faceted US expansion strategy that is unique and provides it with more financial flexibility. It will be challenging for other companies to replicate this type of business model, providing the company with what we believe are sustainable competitive advantages, and believe that Australis is well positioned for long-term growth.
An Efficient Growth Story to be Aware of
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.
ALPS is responsible for constructing some of the largest state-of-the-art cannabis facilities on the planet to date, 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.
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 has proven its ability to execute in the traditional horticulture sector, which will create a diversified and de-risked revenue stream for Australis. We expect that the profitable nature of these operations will generate significant cash flow in the near and long-term, and expect it to support Australis’ cannabis expansion across multiple states.
We believe that Australis is in the early innings of a major growth cycle and if you are interested in learning more about the opportunity, please send an email to email@example.com with the subject “Australis Capital” to be added to our distribution list.
Pursuant to an agreement between StoneBridge Partners LLC and Australis Capital Inc. we have been hired for a period of 180 days beginning February 8, 2020 and ending August 8, 2020 to publicly disseminate information about (AUSA) including on the Website and other media including Facebook and Twitter. We are being paid $6,000 per month (AUSA) for or were paid “ZERO” shares of unrestricted or restricted common shares. We plan to sell the “ZERO” shares of (AUSA) that we hold during the time the Website and/or Facebook and Twitter Information recommends that investors or visitors to the website purchase without further notice to you. We may buy or sell additional shares of (AUSA) in the open market at any time, including before, during or after the Website and Information, provide public dissemination of favorable Information.