Cannabis Stock Analysis #5: Emblem Corporation
Jan. 22, 2018
By North Channel Investments - Seeking Alpha
Emblem appears more a stock that will grow slowly but steadily over the next few years.
Emblem provides the lowest price to book ratio in comparison to the Canadian cannabis sector.
Growth prospects within their production are not peanuts compared to competitors. However, Emblem has signed two strong agreements which will boost their revenues in the next few years.
Introduction
As the Canadian cannabis industry continues to boom, investors search for the companies that provide the best value and growth prospects. While the cannabis sector is extremely overvalued and provides high risk but also high opportunity for investors to make money, there are still are a few smaller cannabis companies that can provide slow but steady growth over the next few years that also are much safer based on their valuation metrics.
North Channel Investments has already published four cannabis stock articles, where Cronos Group, Aurora Cannabis, Organigram, and Canopy Growth have all been analyzed based on their valuations and growth prospects.
Today’s North Channel Investment article will look at yet another cannabis stock, where Emblem Corp. will be analyzed, and will be the fifth installment of North Channel Investment’s ‘Cannabis Stock Analysis’ group.
Business Overview
Emblem Corp. (TSE:OTCPK:EMMBF) is a Canadian cannabis producer and distributor that is based out of Toronto, Ontario, Canada. Formerly known as Saber Capital Corp., Emblem operates under three brands. They are as follows:
Emblem Cannabis – Produces and distributes Emblem’s cannabis products. This brand sells various strains of dried flower and extracts, and also sells a plethora of accessories to consumers.
Emblem Pharmaceutical – Working to develop medical and pharmaceutical products that are made of cannabinoids.
GrowWise Health – Their operations are geared “to providing patients and physicians with complimentary, personalized, education services to make informed decisions about medical cannabis treatment options.” GrowWise currently has 14 educational centers in Southern Ontario, with several more expected to open up in the next year or so. GrowWise also offers connections that allow patients to receive a cannabis prescription.
As the investing world is aware, the cannabis sector has boomed in value over the last year or so. While some companies such as Aurora and Canopy have doubled, even, tripled in value, Emblem has not seen significant growth in their stock price in comparison to their peers. Seen below is a 3 month history of Emblem’s stock value (In Canadian Dollars).
Recent Financials
In November 2017, Emblem released their third quarter financials ending September 31, 2017. While the company has posted a nine-month loss of ~$8.3 million for the year, the company has continued to see strong growth in their revenues. In comparison to the second quarter in 2017, revenue increased 10% from $538,475 to 592,943 in the third quarter of 2017. While these numbers are lower than what they earned in the first quarter of 2017 (1Q revenue of $903,274), Emblem has seen significant growth in their earnings in comparison to last year.
From this we can see that earnings have increased dramatically since 2016, where the company only saw $276,907 in revenue for the year. One reason for the significant variance in revenues over 2017 and 2016 is the fact that the company was working on the construction of several production facilities. It is also key to note that Emblem only received their license to sell medical cannabis in July, where there first sale of cannabis was in August of 2016.
Other positives that are seen from these statements include their increase in patients which increased to approximately 2,600 as of November 27, 2017. This is a 20.8% increase in comparison to what Emblem announced on August 24, 2017 –which was 2154 patients. Revenue per gram also went up from $7.39 per gram in the second quarter to $8.63 a gram. This increase in revenue per gram allowed Emblem to generate higher revenues from dried flower sales in their third quarter while actually selling less product. While I’m not happy Emblem sold less dried flower product, it is an extreme positive that the company continues to increase their profit margins.
GrowWise’s education revenue also saw strong growth over the last quarter, which grew from $116,373 in the second quarter of 2017 to $146,948. This growth is expected to continue as GrowWise has plans to open their operations in several new locations across Ontario.
Overall, while Emblem’s sales are nothing compared to other large cannabis companies, Emblem appears to be growing at a slow but steady rate. An ~$8.3 million dollar loss is definitely not attractive, however these high expenses were caused by increased staffing cost from the increased number of employees, and operation/building cost as they develop their production facilities.
Growth Prospects
There are several growth prospects that make Emblem Corp. attractive. Emblem’s main growth prospects derive from their increasing production yields and agreements they have made with a few companies in the cannabis industry. In their second quarter 2017 press release, Emblem announced the continued expansion of their flower production, which increased from 650 kg per year to 1650 kg. While 1650 kg is peanuts compared to what other cannabis giants are producing, Emblem continues to increase their expected production yields. In their third quarter press release, Emblem announced that this annual output increased to 2000 kg a year which will be reached by the third quarter of 2018.
Yes, these production levels are very small, but Emblem is adding in significant dollars to increase their output. They recently announced the purchase of new lands in Paris, Ontario, which will increase their output by adding another 15,00kg/year. The construction of this facility is expected to start in the second quarter of 2018. Alongside this facility, Emblem also received the OK to begin construction on another 30,000 sq/ft facility, which a portion of the building will be used as a extraction facility, laboratory, and pharmaceutical production facility. These are small but progressive steps towards higher revenues, higher production and eventually turning a profit.
Emblem also released that they received their license to sell cannabis oils from Health Canada. Emblem’s patients will have access to four different cannabis oils, where sales began in December, 2017. These oils will aid in attracting patients to their brands. From the introduction of these oils, I expect we will see a steady increase in revenues for the fourth quarter of 2017 and well into the future, provided Emblem continues to increase their product line (which I think is highly likely).
Another positive growth prospect for Emblem is the fact that they recently signed a deal to work with Canntab Therapeutics Limited for “patent-pending oral sustained released formulation for cannabinoids that Canntab has developed”. This deal will allow Emblem exclusive rights to sell their products in Canada. “These sustained-release products will begin to be manufactured by Emblem or Canntab after Canntab receives appropriate licensing to allow such”.
While it is difficult to say how much revenue Canntab’s products will bring in for Emblem, this deal is another step forward for the company as they will be able to offer yet another product in the market. Emblem also signed another agreement with Dosecann Inc., where both companies are currently working together to create cannabis-oil sprays as well as dose-controlled vaporizers. This is another positive agreement that will take several months to develop sales as research, approvals, and manufacturing plans all have to be developed. Emblem is expected to sell these products while Dosecann receives a royalty.
All of these growth prospects are being funded through their issuance of equity. On Jan 12, 2018, Emblem announced a 50 million bought deal. This large sum of cash will aid the company in the expansion and development of their facilities, as well as the development of their products.
Valuation Metrics Compared to Competitors
When comparing price to book ratio, Emblem racks up against other Canadian cannabis producers as follows.Emblem has the lowest price to book ratio in comparison to other Canadian cannabis companies. This lower valuation provides a lower sense of price volatility which is attractive in a booming cannabis market.
Final Thoughts
While Emblem Corp. has posted significant losses over the last 2 years, the company continues to provide marginal, but steady growth prospects. Emblem has signed two key agreements that will provide an additional stream of revenues that will be seen in the next year or so. Also, Emblem has recently begun sales of their cannabis oils and are boosting their production output, which will grow their revenues and attract new patients.
GrowWise is also a small revenue stream for the company, but continues to grow their revenues as they continue to open up new locations across Ontario and build their brand. There are many other Cannabis companies that provide stronger growth prospects that Emerald, proven by Emerald’s extremely low production levels. While this may be the case, I believe Emblem’s value and growth will be very marginal, and investors will still be rewarded, but over a longer period of time.
To conclude, Emblem is a buy, but don’t expected large earnings right away –expect slow, gradual growth. Investors who prefer a higher degree of safety in the cannabis market will find Emblem attractive, as this stock should be purchased for their lower valuations and steady growth prospects. Overall, Emblem will not provide quick and high earnings, but it does have strong and steady growth potential.
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