Sunniva Looks To Spin Out It's Major California Assets While Canadian Operations Continue To Scale
Although the California recreational market faces a tough test after the state started requiring dispensaries to only sell cannabis products that have tested by a third party laboratory (as of July 1st), the weakness will be transitory and the changes are important for the long-term growth of the market.
California is the largest marijuana market in the world and we have been closely monitoring this burgeoning opportunity. Over the last few months, we have noticed an increase in the number of public companies focused on this market and will keep an eye on this trend. It is important for investors to focus on companies that are executing on previously announced initiatives and are positioned to capitalize on this market. We would be careful of companies that announce non-binding agreements or letters of intent in California, without having the resources to execute.
Sunniva (SNN.CN) (SNNVF) is a leading North American cannabis firm that is well positioned to capitalize on the California market. During the last year, the company has been executing flawlessly on a plan to construct a massive production facility in California as well as Canada. During this time, Sunniva has strengthened its balance sheet to fund these growth initiatives and this is a stock that investors need to monitor.
Retains Canaccord to Spin Out Canada Assets
Earlier this monthw, Sunniva announced plans to spin out its Canadian assets into a separate Canadian entity and apply to list the shares on the Toronto Stock Exchange (TSX) and the NASDAQ. Sunniva retained Canaccord Genuity in connection with the transaction and expects the spinoff transaction to be completed prior to the end of 2018.
The United States assets that would remain with the current CSE listed entity include CP Logistics and Full-Scale Distributors. Completion of the transaction will require satisfying a number of conditions including Sunniva shareholder approval, CSE approval and fulfilling the listing requirements of the TSX and NASDAQ exchanges, none of which can be assured.
This was a significant announcement and would be a strategic way to create value for shareholders. Since cannabis is legal in Canada, these assets could trade on an exchange like the Nasdaq. We are monitoring how the team executes on this and are excited by this development.
California: A Major Growth Driver for Sunniva
We have been monitoring Sunniva closely and expect the California market to be a major value driver. Over the last year, company has made several strategic acquisitions that have already proved to be accretive and we are bullish on the growth opportunities. Sunniva is in the middle of a major expansion in California and this is something to keep an eye on.
The California facility will be completed in two phases. Phase One includes the construction of a 325,000 sq. ft. facility, comprised of eight 22,000 sq. ft. flower rooms. Phase two will be 165,000 sq. ft. facility, comprised of eight 10,000 sq. ft. flower rooms. The California cGMP Campus will produce Sunniva branded products and private label solution for leading brands.
Sunniva expects 50% of the facility cultivation to be initially manufactured into higher margin extracted products. The company is currently negotiating letters of intent with distribution networks and are negotiating long-term supply contracts with brands for private label services. We are favorable on this approach and will monitor how the team continues to execute.
Continues to Execute and Advance in Canada
Last month, Sunniva’s subsidiary, Sunniva Medical Inc. (SMI), acquired a 126-acre property, which will be the site of the Sunniva Canada Campus. SMI also announced that it was issued the required development permits for the construction of the facility. SMI plans to build out more than 700,000 sq. ft. of Good Manufacturing Practice (cGMP) greenhouses, which could produce more than 100,000 kilograms of premium cannabis flower a year plus higher margin extracted products such as capsules, cartridges, tinctures and creams.
SMI is currently in the review stage of the Health Canada’s ACMPR application and we are favorable on this subsidiary due to the relationship with Canopy Growth Corporation (WEED.TO) (CGC). Earlier this year, SMI signed a definitive supply agreement with Canopy to purchase up to 45,000 kilograms of dried cannabis per year. The companies plan to split revenues and we expect this to be a major value driver for Sunniva in 2019 and beyond.
This facility will act as the primary production facility to meet the supply goals of Canopy and Sunniva, making the issuing of permits a major milestone. The facility will produce cannabis products to supply the current medical market and the upcoming legalized recreational market in Canada.
A Stock to Watch
Last week, Canaccord initiated coverage on Sunniva with a Buy rating and a $13 price target. The shares popped higher on strong volume following this upgrade and has recently come off its highs. This is a favorable development for Sunniva as it improves awareness with one of Canada’s largest broker-dealers.
Although Sunniva continues to execute, the shares have been trading mixed-to-lower and we are monitoring the recent decline. Sunniva is one of the few companies to have attractive leverage to the Canadian and United States market and represents a legitimate long-term player.
Sunniva has already virtually de-risked its business model by leveraging strategic commercial real estate and merchant banking relationships to produce 100,000 kilograms of cannabis dried flower and trim at full capacity. There are very few companies as attractive positioned as Sunniva and this is a stock investors need to keep an eye on.
