Company Overview: Elixinol Global Limited (ASX: EXL) is an Australia based company which is engaged in the industrial hemp and medicinal cannabis businesses through its three distinct business units i.e., Elixinol LLC (Elixinol USA), Hemp Foods Australia Pty Ltd, and Elixinol Pty Ltd (Elixinol AUS). The Group was incorporated on September 04, 2017, headquartered in New South Wales and is being headed by Mr. Paul Benhaim – the Executive Director and Chief Executive Officer (as at July 2018). It manufactures and produces CBD Hemp oil for use in medical cannabis sectors. The Group has a strong footprint across the globe wherein it distributes its product mix in 40 Countries through multiple sales channel. The company is progressing towards vertical integration across the value chain to further secure the company’s position as market leader of hemp CBD derived products.
 

EXL Details

Elixinol USA enters into joint venture to cultivate high-CBD organic hemp: Elixinol Global Limited (ASX: EXL) is an Australian group that is aiming to become a leader in the industrial hemp and medicinal cannabis businesses. Elixinol is a small-cap company with the market capitalization of circa $146.16 Mn as of July 31, 2018. Recently, the group’s subsidiary, Elixinol USA and Kersey Ag Company LLC have formed a joint venture in the name of the Northern Colorado High Plains Producers (NCHPP) with the equity capital in the proposition of 50% each. The venture has been commissioned in FY18 and it is expected to secure the ongoing supply of Elixinol USA’s products that are distributed throughout the USA and to over 40 countries globally and will support the Company’s plans for sales and revenue growth. According to the management, this strategic partnership will allow significant growth than earlier, and support to ramp up the sales of Elixinol products across the USA and globally.


Best revenues of all ASX-listed cannabis stocks (Source: Company Reports)

Quarterly Activity Update (30 June 2018): During the quarter ended June 2018, the group has progressed well and reported revenues of A$8.0 Mn, representing 21% growth on Q-o-Q basis and 111% growth on the Y-o-Y basis. This solid growth was primarily driven by high demand for hemp-derived cannabidiol (CBD) dietary supplements and skincare products incurred during the period. Cash outflows for the period were around A$11.7 Mn which was A$0.7 Mn lower than the estimates as compared to the previous quarter due to favourable payment terms negotiated with equipment suppliers for the new U.S. facility, timing to fully fund the previously announced investment in NCHPP and were offset by higher inventory payments to facilitate ongoing product demand. At the end of the June quarter, the group held A$14.2 Mn cash in the bank and A$0.25 Mn in debt. Further, the group estimated cash outflow for the September quarter which will be approximately A$13.9 Mn, comprising of capital expenditure (A$4.0 Mn) which primarily relates to the fit out and equipment of the new US facility and includes the balance of the investment in the NCHPP joint venture. We expect that the Group will continue to increase its sales and marketing resources to support the expected ongoing growth backed by aggressive CAPEX plan.


Revenue Trend (Source: Company Reports)

Approval for the consumption of cannabis product in the U.S. – Supporting Top-Line Growth: At the end of June 2018, the United States Senate passed the 2018 Farm Bill, which includes the Hemp Farming Act of 2018 (S.2667) wherein industrial hemp cultivation and hemp products are to be legalized to trade in the United States. This is an opportunity for the company to openly advertise and market its product mix directly to American consumers. Hence, we expect that this move will represent an important validation of medicinal cannabis and a flow on effect to sales of over the counter CBD nutraceuticals where the Elixinol brand is a leader in the US market can be realised.
Elixinol USA expands hemp processing and operations facilities: To increase production capacity and sustain future growth, Elixinol USA has plans to relocate to a newly leased facility in the Colorado Tech Centre (CTC), situated in the neighbouring town of Louisville and it is expected to be completed by October 2018. This strategic move will provide two-fold space for processing, manufacturing and fulfilment operations, and the group will be setting it up for future growth. Notwithstanding this move, Elixinol USA has signed a deal to purchase an adjoining parcel of land within the CTC at the cost of US$0.3 Mn with the objective of further expansion of Elixinol USA operations to support the future growth.


Global Segment Channels (Source: Company Reports)

Import and/or export license for Medical Cannabis: Elixinol Pty Ltd (Elixinol Australia) has recently submitted its licence application to the Office of Drug Control (ODC) for importing, cultivating, manufacture and distribution (including export) of medicinal cannabis products. However, there is no assurance or guarantee that the necessary licences and permits will be granted to Elixinol Australia or granted on the terms anticipated by Elixinol Australia. If it is approved, then the company will be able to cultivate and manufacture medicinal cannabis products for use in the Australian market and for export to other countries. As of now, Elixinol Australia focuses on obtaining the range of required licences to undertake its proposed activities, establishing of the greenhouse cultivation and manufacture facilities, and developing proprietary CBD/THC medicinal cannabis products for a range of indications. We expect that it would be a turning point for the company in the Cannabis industry, signalling more opportunity in the future, if the company achieved required licences.

Highly Experienced Management Team: The company has been loaded with the highly experienced management team that is being currently headed by Chief Executive Mr. Paul Benhaim who is the co-founder of both Elixinol US and Health Foods Australia. He has rich exposure in industrial hemp and medicinal cannabis sectors which spans more than 25 years of experience with particular focus on industrial hemp legislation, cultivation, manufacturing, production, sales and marketing in Europe, North America and Australasia regions. Moreover, the members of its senior management team have significant experience and expertise across industrial hemp, medicinal cannabis, skin care food and nutritional products, manufacturing, product development, sales, marketing, distribution and finance division, ensuring robust business growth by supporting and providing guidance to the employees.


Board and Management (Source: Company Reports)

Financial Highlights: The group posted FY17 financial highlights on proforma basis wherein revenue grew by 62 per cent to $16.5 Mn in FY17 against FY16. Gross Profit increased by 64 per cent in F17 as compared to the prior year. The Group has delivered positive EBITDA of $20k, highlighting the cash generation of Elixinol Global’s underlying businesses. In January 2018, the company raised A$20 Mn through initial public offer (IPO). The main objective of this fund was to provide the Company the financial flexibility to fund working capital to grow the Elixinol Group including, but not limited to, marketing, distribution, product development, operations and other growth opportunities. The current ratio and quick ratio stood at 9.50x and 8.49x, respectively in FY18, representing adequate liquidity to fund into the Australian Medical Cannabis market and other growth initiatives. Moreover, the company enjoys virtual debt-free status along with decent cash & cash equivalent reserve of $18.8 Mn as at 31 December 2017. No dividends were proposed or paid during the period.


Pro-Forma Income Statement (Source: Company Reports)

Positive Outlook: We are optimistic on the company growth story as we believe that the underlying growth dynamics are now much more favourable after Senate approval on medical cannabis usage in the U.S. market. We expect that the company will sustain its healthy growth momentum in years to come supported by the company’s strategy of focus on high margin business through innovation on hemp-derived consumer products, expanding market base and strong footprints in hemp CBD derived products to drive overall sales.

Stock Performance: The group is well placed to capitalize the opportunity across its two industrial hemp businesses i.e., Hemp Foods Australia and Elixinol USA at the back of healthy product development pipelines, and the recent regulatory changes in Australia and potential changes in the US. For Elixinol Australia in the medicinal cannabis space, there is a significant opportunity once licenses are granted. On the other hand, the group has recently disclosed the result of Annual General meeting wherein the shareholders of the company have approved several resolutions such as adopting remuneration report, re-electing Mr. Paul Benhaim as a director of the company, approving Issuance of Performance Share Rights for Mr. Paul Benhaim, Ms. Linda McLeod, Mr. Andrew Duff, and Mr. Stratos Karousos. Meanwhile, the share price tumbled 2.07 per cent since listing on ASX and by 15.98 per cent in the past three months as on July 30, 2018. The stock price was down by 2.465 per cent on July 31, 2018 and we expect that there is a growing momentum in years ahead given the fundamentals that may turn positive. Hence, we give a “Speculative Buy” recommendation on the stock at the current market price of $ 1.385, considering growth in the US business and assuming Hemp Foods Australia business to touch higher earnings in years to come.
 

EXL Daily Chart (Source: Thomson Reuters)

 
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