Initiating coverage: Emerging global player in medical marijuana
ICC International Cannabis Corporation (“ICC”) is a licensed producer and marketer of cannabis, cannabis extracts, and industrial hemp products.The company is at an early stage of development having limited revenues and no profitability. ICC's operations are located in Uruguay, where the government legalized recreational marijuana in 2013. ICC has access to 567 acres of land licensed for hemp cultivation, from which it intends to produce CBD extracts. The unique regulatory structure of Uruguay provides ICC with the ability to cultivate hemp with CBD concentrations which are amongst the highest in the world. CBD (cannabidiol) is the second most prominent compound in cannabis and is considered to have several therapeutic qualities. In recent years, the acceptance of the therapeutic benefits of CBD has become more widespread, leading to significant increases in global demand. Medical marijuana has been legalized in several European and Latin American countries recently, opening up export opportunities for ICC’s CBD extracts. We believe these countries could remain reliant on imports for the next several years, thus providing ICC with highly accessible distribution channels. Our positive outlook on ICC is based on the following: Exposure to rapidly growing CBD extract markets globally. We estimate that the global CBD extract market could reach $1b within five years, up from less than $100m currently, when excluding the US and Canada. Strategic location provides cost advantage. In Uruguay, ICC is able to grow hemp without CBD concentrations limits while European countries are capped at 5% and Canada at 0.3-0.4%. This gives ICC a significant yield advantage, given that we estimate its strains have 10-15% CBD. Appealing risk/reward. With its current acreage, we estimate that under a bullish case scenario, ICC could generate revenues of $300m and $100m in EBITDA which could support a valuation in excess of $5 per share. In a bearish scenario which excludes the CBD extract opportunity, we estimate ICC’s domestic business could still be valued at $0.50 per share. Hence, with material upside potential and some downside protection, we view ICC’s risk/return profile as being quite appealing. Initiating coverage of ICC with a SPECULATIVE BUY rating and a $2.50 target. We derive our target using a 10-year DCF model with a discount rate of 18%.