Chalice Brands Ltd (CHALF)

[Marillionaire]

Golden Leaf Holdings Cannacord Genuity recommends Initiation of Coverage A Golden opportunity SPECULATIVE BUY PRICE TARGET C$0.46

Golden Leaf is an Oregon-based, vertically integrated cannabis company, which benefits from operating in all areas of the value chain; including, cultivation, extraction, product manufacturing, and sales to retail customers through its branded dispensaries. This is of particular importance as the cultivation of cannabis alone continues to become commoditized in maturing markets, and we believe brands will eventually emerge as the winners in the industry. The company has already launched an established portfolio of award-winning brands in the Oregon market; and, based on our site visits to multiple legalized US regions, we believe its Chalice Farms dispensary brand is one of the more impressive operations we have toured to date, from its design, product selection and attention to quality. Golden Leaf currently trades at ~8.0x its two-year fwd EV/EBITDA, compared to its US peers at 8.7x. More importantly, we note that US companies trade at steep discount to the leading Canadian Licensed Producers (at ~24.2x), likely due to marijuana’s continued classification as a Schedule I narcotic in the US. As a result, we believe Golden Leaf is another prime example of the relative valuation gap between US and Canadian cannabis exposure, and the company could see a significant valuation re-rating as US sentiment continues to improve.


Investment Highlights & Risks · US recreational exposure drives our forecasts. With an existing presence in Oregon, a first mover in Nevada’s recently implemented rec market, Canadian exposure, and optionality in Washington State, we forecast that Golden Leaf will realize ~US$27M of revenues in FY2018, increasing by a 42% CAGR to US$110M by FY2022, resulting in EBITDA of US$37M and Free Cash Flow of US$25M at that time.


Valuation: We value GLH using a sum-of-the-parts analysis for each market where it has exposure. We utilize a DCF methodology, with discount rates ranging from 10% to 13% and terminal growth of 2%. Together, our SOTP valuation yields a target price of C$0.60 (still an attractive ~13.7x its two-year fwd EV/EBITDA). This represents a forecast return of 57.9% and supports our SPECULATIVE BUY rating. Given the risks associated with its high growth profile and the continued lack of US federal support, we believe a ‘Speculative’ classification is most appropriate at this time.