Cannabis stocks have had a tough year with massive sell-offs seen across the industry. Yet this presents opportunities that are difficult to ignore. Global cannabis investment group MMJ Group Holdings (ASX: MMJ) is one such group. The group is trading at a steep discount to its intrinsic value, as noted in its March quarter activity and investment update.
Like most players in the cannabis industry, MMJ’s share price has fallen significantly over the past 12 months, but it should be remembered that this is a diversified operation that offers investment opportunities across all emerging cannabis-related sectors, including healthcare, technology, infrastructure, logistics, processing, cultivation, equipment and retail.
Indeed, it is the only ASX-listed investment firm that offers Australian investors the opportunity to invest in cannabis-related companies unlisted and listed in Australia and overseas.
Highlighting the strength of MMJ’s investments is its net tangible asset value of around 20.5 cents per share, or $ 46 million, as of March 31, which implies a 150% share price rise per share. compared to its closing price of 8.2 cents on April 8.
Additionally, MMJ has a proven track record of acquiring and realizing considerable value from its cannabis-related investments.
Since 2015, MMJ has created a significant number of investment opportunities from its connections in Canada and Australia in the private investment sector and made exits that have benefited its shareholders.
Therefore, one could argue that MMJ does not deserve the widespread treatment that has characterized the cannabis industry for the past 12 months or so.
Learn about the wine and spirits industry
MMJ’s management provided an interesting insight into the dynamics within the cannabis industry and its leadership. Understanding these dynamics is essential to establish a strategy that underpins investment in companies that can provide optimal returns to shareholders.
From a broader perspective, MMJ is optimistic about the economy as a whole, but more importantly, he is convinced that he has selected the winning sub-sectors in the cannabis space.
Therefore, management believes that now is the time to seek investment opportunities in a recovering market.
MMJ made an interesting analogy with other industries that have similar supply chains that cover planting, harvesting, production, distribution, and marketing.
On this note, management gave an overview of the functioning of the wine and spirits industry.
âThe cannabis space is unique, but the evolution of its products is unlikely to be much different from other social entertainment products such as wine and spirits. A farmer must cultivate the different plants (grapes, potatoes, etc.) necessary for the production of different types of alcohol. The farmer then sells the biomass to a factory which in turn produces various end products for consumption. These products are differentiated and marketed, which in turn creates long-term brand loyalty. In the case of wine, the farmer also creates the biomass and the end product while marketing and finding customers.
âHowever, the majority of the wine and spirits industry’s revenue comes from the first type of arrangement, not the second. Indeed, agriculture is not a very attractive industry from a long-term growth perspective and therefore receives very little attention from the capital markets. In addition to being very capital intensive, the growth of this industry depends on the increasing size and use of farms. However, companies that buy biomass and turn it into consumer products are much more attractive from a growth perspective and therefore also from a capital market perspective. “
Put your head in cannabis
Management believes that cannabis is superior to wine and spirits in terms of the positive effect on the individual and on society as a whole, and its potential for secondary consumer branded products.
However, the cycle from the plant to the shelf is not likely to evolve in an extremely different way.
The cannabis industry in North America is likely to have several large players and many small specialist players.
Simply put, the majority of customers will consume the cannabis equivalent of Bud Light’s and Heineken’s while some of the enthusiasts will focus on smaller volume growers and niche brands.
Given this dynamic, it is imperative not to own the farmers, but rather the processors and mainstream brands. MMJ’s investment portfolio is biased towards this industry sub-sector.
In fact, excess capital investment at bubble valuations in the agricultural sub-segment of the cannabis industry is what led to the overcapacity and collapse of cannabis stocks in 2019.
MMJ, however, continues to be well positioned in a recovery scenario by focusing on mining and mainstream branded products.
Impact on MMJ’s investment portfolio
Management explained that extraction is the engine that will generate higher margins in the cannabis space, as it converts biomass into a variety of products that consumers perceive to be more value-added.
On a combined basis, this sub-segment represents 39% of the total group portfolio and includes Embark Health, Sequoya Cannabis and Medipharm Labs.
After mining, the next driver of high margin growth will be consumer branded products, as they offer specific on-shelf items that customers can rely on for consistent pricing and the desired effect.
MMJ’s holdings in this sub-segment include Volero Brands, WeedMD and Harvest One.
In total, CPG represents approximately 38% of the group’s total portfolio, and combined these two core cannabis 2.0 sub-segments represent almost 80% of its total portfolio.
While COVID-19 will cause intermittent disruption, management is very optimistic about the prospects for MMJ’s business investments.
In summary, management has said that names in the cannabis industry that focus on extraction and consumer branded products will recover and lead the industry higher as the coronavirus disruption wears off.
A key point to remember is that some companies have disproportionate capital linked to cannabis cultivation, and these will seek to divest themselves of these capital-intensive assets and focus on extracting higher margins and consumer branded products.
These cannabis 2.0 companies will also have higher valuations in the public markets.
This should offer private MMJ companies such as Embark Health and Sequoya Cannabis the opportunity to become publicly traded entities, a development that would capture the intrinsic value of companies.