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Is Sunniva (SNN, SNNVF) The Most Undervalued Company In The Sector? $3.82 (US), Potential For $80+ In 2021

|Includes: Sunniva Inc. (SNNVF)
Summary

Analysts average price target 2.9x current value, compared to US peers 5x undervalued.

Needs only $9.1M in net income to justify current share price.

Total Us assets have the potential to generate $101.9M in net income for a share price of $42.80 in 2021.

100,000 KG (+20,000 KG of Trim) Canadian Campus potential to generate $91.5M in net income for a share price of $38.40.

Total Potential of US and CAD Facilities to generate net income of $193.4M for a share price of $81.26 ($106.59 CAD) in 2021.

Disclaimer: I have 27k shares of Sunniva (SNNVF in US, SNN in CAD). What I have to say may sound too good to be true, and maybe it is. Which is why I recommend you take what I say and do your own research to test its validity. Please do not just take my word for it.

I know most will click this thread, skim through it, look for the big number (spoiler: it's $81.26 US in 2021) and proceed to say "bull****," and that's a healthy response to something so ridiculous. But is it ridiculous, or does Sunniva actually have the potential to become the "Canopy of California" and a player in Canada?

If you're interested in making money, read what I have to say, do your own research, and see if you arrive at the same conclusion I have. To disregard this post and label it a "pump piece" would be doing yourself a disservice. Remember, Canopy Growth Corp. was $2 US two and a half years ago.

Current Price $3.82 US ($4.94 CAD) - Analysts Average Price Target $11.38 US ($14.75 CAD) or 2.9x Current Value - Undervalued by 5x Compared to US Peers - Comparable Share Price $19.50 ($25.46 CAD)

Sunniva closed this week at $3.82 US ($4.97 CAD). Beacon Securities currently has a target price of $ 12.73 US (16.50 CAD) and Canaccord Genuity has a target price of $10.03 US ($13 CAD).

That's worlds away from my target price of $81 US in 2021, but it tells you that even analysts who are paid to know what they're talking about believe Sunniva is significantly undervalued at the current time, nearly 3x less than its suppose value. With that said, professional analysts aren't always right.

On October 15, 2018, Beacon Securities issued a comparable valuation of Sunniva relative to its US Peers. According to the report, Sunniva is currently undervalued roughly 5x compared to its US peers such as MedMen, Ian, and MPX. 5x its current value would put Sunniva's share price at $19.50 ($25.46 CAD).

I will be using US numbers from here on, because currently it's more of a US play than Canadian

A generic sentence about the company copy and pasted off the website so you have a general understanding of who and what they are: Sunniva is a vertically integrated medical cannabis company operating in the world’s two largest cannabis markets – Canada and California – where they are committed to delivering safe, high-quality products and services at scale. Sunniva is focused on executing a ‘seed-to-sale’ business strategy of leveraging its owned large-scale cultivation and extraction facilities to move up the value chain with the launching of a suite of Sunniva brands across all product categories while aggressively pursuing distribution & retail expansion.

Now, before getting to the good stuff, I want to illustrate the risks and concerns of the company. I do not want to be a pumper or shill. I have already taken a swig, but allow me to warn you before you take a sip from the Sunniva punch bowl.

Risks/Concerns - READ BEFORE DRINKING THE KOOL-AID: (besides the obvious risks when you're investing in speculative industry like medical/recreational cannabis)

  • Over the past six months Sunniva has lost $11M while producing $10M in revenue, equating to $1.8M lost per month, and have roughly $7-10M in the bank to hold them over until they're turning profit. At the current rate, $7-10M will keep them afloat for 3-5 months (Jan-Mar 2019). With 4 extraction contracts secured and dry flower production expected to begin in the next two months, we expect the losses to drastically decrease each subsequent month and eventually turn over into profit. One more bought deal may be in the cards come Q1, but by that time the share price should be significantly more than it is now, and another 2.5-4M shares when you only have 47.6M fully diluted isn't a big deal.

  • Sunniva has yet to secure the $120M financing for the Canadian Campus Facility that will be producing 100,000 kg at full capacity. This was supposed to have been procured by June 30, 2018, but there has been a delay, and management's public statement regarding the matter as of the Q2 Conference Call on August 28 is, "We continue to work with our lending partners and we are talking with a variety of financial institutions in funding that Canadian facility. That’s our status right now and we continue to work towards that." In their recently updated investor presentation they state, "Negotiating funding through senior secured and/or subordinated debt and have retained Canaccord to review strategic alternatives."

  • On July 10, 2018 Sunniva announced its intention a spin out its Canadian assets and list on the TSX and Nasdaq. The Company expects the Spinoff Transaction will be completed prior to the end of 2018. The spinoff received praise from analysts, but with the lack of clarity regarding the situation, and the delay in financing for the Canadian Campus, the market did not respond favorably and Sunniva has since plummeted from $6.24 to $3.82.

  • The final short form prospectus dated October 4, 2018, states " On July 10, 2018, the Company announced that it intends to spin out its Canadian assets into a separate Canadian entity and apply to list the shares on the Toronto Stock Exchange and the NASDAQ Stock Market as it considers potential strategic alternatives to unlock the underlying value of the Company’s assets on both sides of the border (any such strategic alternative, a “Strategic Transaction”). A Strategic Transaction could include, among other things, a sale of, an investment in, or a joint venture for some or all of the Company’s Canadian assets. Depending on the nature of the Strategic Transaction, a number of conditions may require satisfaction including, but not limited to, Company shareholder approval, CSE approval and other stock exchange approvals, none of which can be assured."

  • As of October 12, 2018, Sunniva has retained Cannaccord Genuity who has commenced a formal process to review all strategic alternatives which may include a sale of, an investment in, or a joint venture for some or all of the Company's Canadian assets with the intention to spin out the Company's Canadian assets into a separate Canadian entity and apply to list its shares on the Toronto Stock Exchange and the NASDAQ Stock Market. There is speculation that if a joint venture is done, it will be with Canopy Rivers.

  • Regarding the wholesale agreement with Canopy whereby Sunniva has committed to sell Canopy 45,000 kilograms of premium quality cannabis annually over an initial two-year period commencing in Q1 2019. If the Licensing Condition is not met by the end of January 2019, Canopy has the ability to terminate the Agreement. Sunniva is in discussions with Canopy to extend the initial start date of the agreement to give them additional time to comply with the Licensing Condition as the facility will most likely not be ready in time to receive licensing in Jan 2019.

  • Management has done a poor job of promoting the company up to this point. Look no further than the share price for evidence of this. This has been corrected however with the recent retaining of KCSA Strategic Communications, a leading New York-based communications firm on October 10, 2018.

  • Neither the California Campus, nor the Canadian Campus is operational. California should be operational and planting in December, and all signs indicate they are on track to meet their timeline of first harvest in Q1 2019, but this must be noted. California Phase 1 is fully funded. As stated above, the Canadian Campus it is not fully funded. However, as you will see, the California side alone is worthy of your investment.

Enough of the Bad, Why Should I Buy Sunniva?

Math Will Be Used Here

Share Price Math Formula - Total Proposed Production Capacity multiplied by profit per gram = X, X divided by Total Outstanding Shares = Earnings Per Share. Earning Per Share multiplied by Price-Earnings Ratio = Share Price

I will be using a conservative estimate of $1 net profit per gram and a P/E Ratio of 20. This P/E ratio is based off an average of the US P/E ratio of Tobacco companies (13.8), Alcohol Brewers (20.3), and Pharmaceuticals (27.7).

Company Background

CEO Dr. Anthony Holler has been here before. He co-found ID Biomedical, a vaccine manufacturer that was acquired by British pharmaceutical giant GlaxoSmithKline for $1.7B, and achieved success with the company by using the same strategy he has applied to Sunniva; produce at low cost, at a high level of quality, and at scale.

I will mostly be playing with numbers in this post, and these numbers are conservative. If you want to know more about Sunniva and its management/assets, I suggest you check out their Investor Presentation, this interview in June with CEO Tony Holler (warning: a lot has changed since then), and these two articles written by Jeff Khoshaba (Sunniva: Gift Of The Sun, Gift To Investors and Sunniva: The Cannabis Sector’s Ultimate Value Stock). Keep in mind, Jeff is also invested in Sunniva, but it will give you a solid background on the company.

One of the Lowest Share Counts in the Sector - Minimal Dilution

Sunniva closed this week at $3.82. It has only 47.6M fully diluted shares and a fully diluted market capital of $182M. Having only 47.6M outstanding shares is a testament to management's desire to preserve share holder value and avoid dilution common in the sector. For comparison, Canopy Growth has 483.5M fully diluted shares, APH 260.5M, ACB 1B, iAN 108.7M, Tilray 101M, TGOD 328.7M, HEXO 229.4M, MMEN 464M.

Just for fun, if Sunniva had the 464M outstanding shares that MedMen currently has, the stock price would be $.39 instead of $3.82. If MedMen had only 47.6M outstanding shares instead of 464M its share price today would be $63.26 instead of $6.49. That's the power of dilution. (I'm getting my fully diluted share count for MedMen from this article)

Needs Only $9.1M in Net Income Annually to Justify Current Share Price

In order to justify Sunniva's current share price of $3.84 using a P/E ratio of 20, Sunniva would need a Net Income (net profit) of $9.1M annually. So the risk you're taking at buying at the current price is whether or not you think Sunniva can make more than $9.1M in net income annually. They can and they will. Here's why.

50,000 KG (+10,000 KG of Trim) Phase 1 California Facility Estimated $60M in Net Income Equates to $25 Share Price

Sunniva is building a 60,000 kg, planned modern, cGMP-compliant greenhouse in Cathedral City, California that is expected to be more energy efficient and produce less waste than indoor cultivation. They are also expected to grow better plants, using a recycled water system to conserve as much water as possible. The system not only helps maximize plant yield but also will provide thorough root aeration and precise nutrient delivery to the plants. Their Integrated Pest Management System is expected to ensure that every plant they grow is certified clean and free of all contaminants and pesticides. This facility will become operational in Q4 2018 with first harvest expected in Q1 2019.

It is expected to reach full capacity by Q3 2019. Sunniva will be have first mover's advantage in California, the largest legal cannabis market in the world, and be unmatched in terms of scale. (Sunniva California Campus - August Construction Update)

Doing the math, Sunniva will have eight 22,000 sq. ft. cultivation bays. At 60,000 kg (including 10,000 kg of trim) it would allocate to roughly 7,500 kg per bay. If one bay is up and running and produces at capacity, it would net $7.5M in net income at $1 net profit per gram. That's only $1.6M less than needed to justify the current share price.

They have already poured concrete in one of the bays Thursday, October 18, meaning things are moving ahead as planned and *at least* one bay should be ready to go in Q4 and first harvest will be on time in Q1 2019. With each subsequent bay taking roughly one and one-half months to complete (based on time to full capacity), they should be at half capacity (30,000 kg) by May 2019 and capable of generating $30M in net income from there on.

At full capacity, expected in Q3 2019, 60,000 kg at $1 net profit per gram is $60M in net income. Over ten times the amount needed to justify the current share price. $60M in net income, with 47.6M outstanding shares, at a P/E ratio of 20, brings about a share price of $25 US. Keep in mind this is just their US assets. They are currently constructing a Canadian facility expected to produce 100,000 kg annually.

On October 17, Sunniva announced it had acquired the Oakland Vision Project, including their licensed cultivation facility located in Irvine, California that has a production capacity of 725 kg per year with development plans to scale production to 3,625 kg per year in 2019, and estimated production costs below $1.00 per gram. They also acquired Vison's seasoned group of cultivation professionals who have experience in both small and large-scale operations. The cultivation team is currently producing some of the highest quality pesticide free cannabis flower in California, and will be used to manage Sunniva's production operations in California. Thus securing Sunniva's 60,000 KG of production from potential mismanagement and catastrophes as we saw recently with Aphira having to destroy a batch of marijuana due to lack of qualified workers.

 

Cali Phase 2 to Add Additional 22,500 KG (+5,000 KG of Trim) (2020) for Estimated Net Income of $27.5M Equates to $11.55 Share Price

Once Phase 1 of the California Campus is completed (Estimated Q3 2019), Sunniva will begin construction of Phase 2 of the facility, adding another 22,500 kg of dry flower, plus 5,000 kg of trim. Currently there is no timeline for Phase 2, but given the time is has taken to build Phase 1, Phase 2 shouldn't take more than a year. With this information, Phase 2 should be complete in Q3 2020, and provide an additional net income of $27.5M for a share price of $11.55 by itself.

Sun Oil Extraction Facility with 4 Contracts - Potential for $14.4M in Net Income Equates to $6.16 Share Price

Sunniva also has an extraction facility one mile from the California Campus called the The Sun Oil Extraction Facility. This facility currently has four contracts (Cali Gold, Farmacy Phactory, Cannabis Strategic Ventures, and an unnamed company) to produce high quality, ultra-purified manufactured distilled oil products to be utilized within vaporization cartridges with expansion into other product areas such as concentrates, fresh frozen, capsules, sprays, tinctures, and beverages expected.

Sunniva's extraction facility will produce over 600,000 filled vaporization cartridges a month at capacity. 600,000 a month x 12 months in a year is 7,200,000 cartridges. At a conservative whole sale price of $10, 7,200,000 filled vaporization cartridges yields 72M in revenue. If 80% of that revenue goes to costs and taxes, that leaves 20% profit (conservative estimate), for a net income of $14,400,000. At 47.6M outstanding shares, the Sun Oil Extraction facility alone yields a $0.30 earnings per share. At a P/E ratio of 20, the Extraction facility is worth a share price of $6.16 US. That's $2.32 more than the current share price of SNNVF. And that's just the Extraction Facility.

Total Us Assets Will Have Potential to Generate $74.4M in Net Income for Share Price of $31.20 in 2019

Combine the 14.4M net income from the extraction facility with the $60M net income from the California Campus Phase 1 and you have 74.4M in net income, nearly 8 times the amount of income needed to justify the current share price, and with a P/E ratio of 20, you have a US share price of $31.20.

Total Us Assets Will Have Potential to Generate $101.9M in Net Income for Share Price of $42.80 in 2021

Adding in the additional $27.5M Net Income from Cali Phase 2, Sunniva in the US alone will have the potential to generate $101.9M in net income in 2021 for a share price of $42.80.

100,000 KG (+20,000 KG of Trim) Canadian Facility Estimated $91.5M in Net Income Equates to Share Price of $38.40

I haven't mentioned the Canadian side of Sunniva yet, and there are two reasons for that. One, the facility isn't expected to produce its first harvest until Q3 2019 and won't be at full capacity until Q1 2020. Two, and more importantly, even though construction is in progress, they have yet to secure full funding for the facility. It was believed that they would secure the 120M necessary via bank and subordinate debt, with minimal if any dilution. However, Sunniva has now retained Canaccord Genuity "who has commenced a formal process to review all strategic alternatives which may include a sale of, an investment in, or a joint venture for some or all of the Company's Canadian assets with the intention to spin out the Company's Canadian assets into a separate Canadian entity and apply to list its shares on the Toronto Stock Exchange and the NASDAQ Stock Market.”

If they do not sell their Canadian Assets, the 100,000 kg facility being built in Okanagan Falls, British Columbia, would generate $120M CAD ($91.5M US) annually at $1 net profit per gram, a share price of $50.37 CAD, $38.40 US in of itself. They currently have a 45,000 kg annual supply deal with Canopy Growth (see Risks and Concerns above), and own Natural Health Services (Canada’s largest network of cannabis clinics, with over 95,000 patients) whom they plan to sell about 30% of their full capacity to at high margins.

Total Potential of US and CAD Facilities to Generate Net Income of $193.4M for Share Price of $81.26 ($106.59 CAD) in 2021

If you take the potential $42.80 share price from their US assets, and combine it with the potential $38.40 share price from their Canadian assets, you're looking at a share price of $81.26 US for Sunniva in 2021. This week it closed at $3.82, which would make for 21x your original investment.

What If They Don't Reach Full Capacity at Their Facilities by 2021?

  • 75% of 2021 Full Capacity Net Income of $193.4M is $145.05M, for a share price of $60.94 (16x current value)

  • 50% of 2021 Full Capacity Net Income of $193.4M is $96.7M, for a share price of $40.63 (10.6x Current value)

In Conclusion

Sunniva plans to vertically integrate across the US, and not just California. I highly suggest you take a look at this potential gold mine that is currently being ignored by the market like a black sheep. With the recent hiring of KCSA Strategic Communications, a leading New York-based communications firm (who handles the Public Relations of cannabis companies such as Aurora, iAnthus, Acreage, MedMen, and MPX) to handle their PR, it's only a matter of time before the secret is out.

$81 is an absurd share price for a company currently trading at $3.82 to reach in just two years. But as I've demonstrated, the potential is there, management just needs to execute. According to the Beacon study, Sunniva is currently 5x undervalued compared to its US peers. That would put the share price at $20, meaning a $81 share price is only a 4x increase over a two year span, as opposed to the 21x of reality. Eventually people are going to realize this, and with a low float (low number of shares available for trading), when Sunniva runs, it will sprint like an Olympic Gold Medalist. With federal legalization coming closer and closer to a reality, Sunniva may have its very own Tilray moment. But that is months, if not a year or two away. For now, ground yourself in the fundamentals of the company, and take advantage of a once in a lifetime opportunity. Worst case scenario at 50% full capacity, you're looking at a potential $40 stock (10.6x current value) in 2021.

Sunniva closed at $3.82 US this week. Its 52 week low is $3.61. When it hit $3.61 on August 14th, it rebounded to $5.70 six days later on August 20th. If you are buying today, you would be buying near the bottom, a great time to get in.

If you are a Sunniva Investor, please join the Sunniva Investor's Discord Group Chat!

Disclosure: I am/we are long SNNVF.