In early 2019, Khiron Life Sciences (otcqb:KHRNF) announced a joint venture with Dixie Brands (OTCPK:DXBRF) and the stock has soared >30% since the announcement. While we think there are risks of a major pullback in the near-term after a 100% surge since December 2018, the latest partnership is another sign that Khiron management is one of the best in the industry and execution has always been a key differentiator for this stock. We remain the view that Khiron represents a unique LATAM cannabis play and a core long-term holding for the portfolios of cannabis investors.
(Amounts in CAD)
The Latin America Gem
From our initial article back in October 2018, "This Cannabis Stock Could Be The Perfect Takeout Target", we have always viewed Khiron as one of our top picks. We like Khiron due to its risk and reward and we believe it is benefiting from several tailwinds. It has a small market value and the market has yet to recognize its advantageous positions in Latin America and potential in Mexico. Current valuation provides an attractive entry position for investors that could have a long-term view. The downside risk is limited due to its modest valuation and supportive long-term industry trends. Upsides could be substantial should our thesis play out. Lastly, we believe the stock is a prime take-out target for larger companies looking to expand into Latin America which adds a nice bonus factor into the story. The recent joint-venture deal with Dixie Brands could be a game changer for the company.
On January 30, Khiron and Dixie Brands announced a 50/50 joint venture whereby both companies will join forces in selling a wide range of CPG and CBD-based products in the U.S. and Latin America. There are several key aspects of the deal that could open up two large cannabis markets.
Latin America: Khiron is a leader in the Latin American cannabis market with its presence in Colombia, Peru, and Chile. It also announced its entry into the Mexican market and it also acquired NettaGrowth to enter Brazil and Uruguay. Dixie will contribute its IP assets including product formulations and brands to help Khiron penetrate its new markets. We think this partnership is a transformative deal for both companies as Dixie's experience with products, brands, and distribution in the U.S. will help Khiron launch its product strategy into the new markets it recently entered. Khiron is building up its production capacity in Latin America and it will benefit from the IP contribution from Dixie while maintaining independence and future potential outside LATAM.
U.S. Hispanic Population: In addition to Dixie's own THC and CBD product lines, it will manufacture and distribute Khiron's Kuida brand of CBD-based cosmeceuticals which will target the Hispanic population in the U.S. We think the exposure provides Khiron an excellent way to enter the U.S. market by leveraging Dixie's existing distribution and retail presence. It could also raise its brand awareness in the U.S. and pave the way for a more expansive launch in the U.S. at a later stage when federal legalization is completed. Khiron is listed on the TSX Venture exchange which means that it won't be able to participate in the American cannabis market directly.
Investors cheered the transaction as the stock rose 47% from $1.97 to $2.88 in the two days after the announcement. The stock has since kept going up and closed at $3.25 last Friday. On the back of its recent surging, the company announced an equity offering of $29 million at $2.20 per share. The stock has surprisingly held up incredibly well after the equity raise and continued to trade well above the issuance price. Management announced a second equity offering at $2.90 per share for $25 million last week, a rare case where two equity offerings were launched almost back-to-back. Clearly, there is an incredible amount of demand for Khiron stocks in the market now.
We are reiterating our positive view of Khiron as we strongly believe the company is in the early innings of establishing its first-mover advantage in the massive Latin America market. The partnership with Dixie will launch one of its CBD brands into the massive U.S. market. Additionally, we see the possibility of Khiron export its products to international markets where it is legally allowed. Khiron's local production enjoys a cost advantage over its U.S. and Canadian competitors and we think it could potentially become an export powerhouse to markets like the EU and Asia. The overwhelmingly positive market reaction to the Khiron/Dixie JV announcement is warranted as Khiron will gain important access to the U.S. markets and Dixie's IP assets. The company is in the early stage of capturing the massive Latin American market and we believe its modest market capitalization ($270 million) indicates lots of room for growth.
For investors looking for a core long-term holding, we think Khiron represents a core holding for two reasons. First of all, Khiron management has exemplified discipline and shrewdness with its M&A and partnership decision. Khiron's management and Board are comprised of high-quality individuals and execution so far has been impressive. Secondly, the company has a modest market value with a large addressable market in Latin America. We believe Khiron is one of the more appealing cannabis stocks that offer both international exposure and an impressive track record. However, we caution investors that its 100+% gain since December has increased the risk of a near-term correction. Interested investors could take the opportunity to build up a position upon any temporary weakness in the stock.
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.