With triple-digit revenue growth q/q in the three months ended November 30, 2018, National Access Cannabis Corp. (OTCPK:NACNF) should attract many cannabis investors. Having mentioned this beneficial feature, the company trades at 12.44x forward, which is higher than the multiple of many competitors. While the valuation can be justifiable as revenue growth and gross profit margin are large enough, the upside potential is limited. In 2019, the EV/forward sales could increase once new retail stores open up. However, the current financial figures don’t represent a clear investment opportunity.
Founded in 2015 and headquartered in Ottawa, Ontario, National Access Cannabis Corp. operates retail locations that sell and distribute cannabis and medical cannabis products besides offering cannabinoid education.
In its most recent history, National Access Cannabis has acquired businesses owning adult-use retail licenses. In addition, the company operates and builds new retail locations to sell its two recreational cannabis brands, META and NewLeaf:
Intending to run stores across the Western Canadian provinces of British Columbia, Alberta, Saskatchewan and Manitoba, National Access Cannabis is also expected to grow in Ontario once it is legally permissible. The market should study closely the number of locations. The amount of potential revenue should increase as the number of stores grows. As shown in the image below, the company has a medium target of 135 stores:
The supply of medical cannabis is another source of revenue for National Access Cannabis. The company employs cannabinoid therapy educators and cannabinoid therapy assistants, who offer product selection and cannabis education and coordinate patient registration with approved licensed producers.
The amount of potential revenue from this activity is significant. According to the materials distributed by National Access Cannabis, the company could be targeting a total market of CAD 146.4 million.
Assets And Recent Acquisitions
With CAD 14 million in cash and CAD 86 million in total assets, National Access Cannabis Corp. should interest investors thanks to its impressive asset growth. From August 31, 2018 to November 30, 2018, the assets increased from CAD 46 million to CAD 86 million, representing 86% increase. The image below provides the list of assets:
While inventory increased from CAD 0.051 million to CAD 2.98 million from August 31, 2018 to November 30, 2018, the most remarkable was the increase in intangible assets and goodwill. In the same time period, intangible assets increased by 197% amounting to CAD 44.45 million and goodwill increased by 543% amounting to CAD 9 million. With these numbers in mind, market participants should be interested in the close assessment of the company’s recent acquisitions.
Acquisitions And Investments
The first recent remarkable acquisition is that of NAC Bio Inc. National Access Cannabis Corp. paid a total of CAD 1 million for this company, a separate legal entity focused on advanced clinical research in the medical benefits of chronic diseases. Unfortunately, the 10-Q did not provide information about the assets owned by NAC Bio Inc. However, the press release that presented the acquisition provided the following description about the activities of the target:
"NAC Bio is aiming to establish a large-scale, longitudinal patient registry that integrates phenotypic and genomic information. Medicine is quickly becoming a data-science and our goal is to provide patients and providers with data-driven insights that enable more informed and personalized treatment decisions with respect to the use of medicinal cannabis." Source: Press Release
In addition, on September 10, 2018, National Access acquired all the shares of The Green Company Ltd. (“NewLeaf”) and paid CAD 23.5 million and CAD 5.8 million in cash. The image below provides a list of net assets acquired. Goodwill represented 24% of the total amount of assets and intangibles comprised of 95% of the total amount of assets. The image below provides further details on this matter:
As noted in the press release about the transaction, NewLeaf was very relevant for National Access Cannabis. It had received 20 development permits and expects to receive 5 more. In addition, it is expected to open 17 stores in Alberta. Read the lines below for further details:
Source: Press Release - NewLeaf
The company reports total liabilities worth CAD 31 million and convertible debentures worth CAD 17 million. In November 2018, the company did not have enough cash to pay to convertible debt holders. With this in mind, investors should expect the sale of equity in the future. A list of the liabilities is shown in the image below:
Revenue Growth, But Negative FCF
Like many other cannabis operators, the revenue growth of National Access Cannabis is quite impressive. In the three months ended November 30, 2018, revenue was equal to CAD 3.78 million, 779% more than in the same period of 2017. The increase in revenues is explained by the sale of cannabis, which comprised of 82% of the total amount of revenue. The gross profit margin is also appealing. In the three months ended November 30, 2018, the gross profit was equal to 38%. The image below provides further details on this matter:
Let’s check the last 10-k to assess the forward revenue. In the year ended August 31, 2018, the company reported revenues of only CAD 1.956 million. National Access Cannabis was able to report revenue of 1.9x the previous annual revenue in three months ended November 30, 2018, which tells a lot about the impressive revenue growth of National Access Cannabis. Check the annual figures in the image below:
In the three months ended November 30, 2018, revenue was equal to CAD 3.78 million, 779% more than in the same period of 2017. With this in mind, assuming revenue growth of CAD 15 million seems very reasonable.
Growth investors should appreciate these features and revenue growth. This type of investors should not care about the net income loss of CAD 7.8 million. If revenue growth and gross profit margin continue to impress the market, the losses may not matter a lot.
With that, value investors should not be interested in this name. In the three months ended November 30, 2018, with CFO of CAD -13.28 million and FCF of CAD -21.39 million, National Access Cannabis needs a significant amount of cash to operate. It means that investors may suffer the sale of equity and stock dilution in the future. The image below provides the cash flow from operations:
Equity Structure And Valuation
National Access Cannabis Corp. sold shares along with options and warrants. The total amount of diluted shares is equal to 204 million. A large number of warrants are expected to expire in 2020, 2021 and 2023. Shareholders should understand that such securities may create stock dilution, which could lead to share price depreciation. The image below provides further details on this matter:
Assuming 204 million shares at $0.68, the total market capitalization should be equal to $138 million. Deducting CAD 14 million or $10.5 million in cash and debt of CAD 17 million or $12.75 million, the total enterprise value should be equal to $140 million.
Assuming revenue growth of CAD 15 million or $11.25 million, National Access Cannabis is trading at 12.44x forward sales, which is more than that of most competitors. While National Access Cannabis reports more gross profit margin and revenue growth than peers, the company does not represent a clear opportunity at the current EV/forward sales multiple. It does not seem cheap as compared to peers of similar size. Other competitors are trading at 1x-25x sales with revenue growth of 25%-898% y/y and gross profit margin of 6% to 86%. The image below provides further details on this matter:
Certain market participants may compare the company with Tilray (TLRY), Aurora (ACB), Canopy (CGC), or Cronos (CRON), which trade at more than 19x forward sales. It appears to be a mistake. First of all, keep in mind that National Access Cannabis is a small competitor. But, that’s not all. The companies are producing cannabis, which should generate a larger gross profit margin than operating retail locations. This is a big difference. The image below provides the EV/forward sales multiple of these large peers:
The lines below were taken from the last management discussion and analysis report. They say that National Access Cannabis is not expected to become a licensed producer. As said, in terms of company valuation, this is a very relevant feature:
“The Company has no current intention of becoming a Licensed Producer and has no current intention to apply for a license to produce cannabis under the Cannabis Act (Canada). In the event the Company becomes a Licensed Producer, conflicts of interest may arise between the Company’s current medical clinic business and its future Licensed Producer business” Source: MD&A
In the three months ended November 30, 2018, revenue was equal to CAD 3.78 million, 779% more than that in the same period of 2017. With this figure in mind, many market participants may accept paying 12.44x forward sales for the company’s shares. While this figure may be justifiable, the company is already trading above the level of other cannabis retailers. Taking into account the fact that the potential upside in the valuation does not seem to be large. As a result, the company does not appear to represent an investment opportunity.
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.