Investment dealer Eight Capital is bullish on the Canadian cannabis retail sector in anticipation of the legalization of edibles and the sale of high-margin products, and it has initiated coverage on Westleaf Inc. (TSX-V:WL) (OTCQB:WSLFF) on Tuesday with expectations the vertically integrated company will see major gains in 2019 with its formidable retail portfolio.
As the cannabis industry continues to improve supply issues and lower wholesale prices, it is causing a land grab for real estate space as provinces issue more retail licences. And Eight Capital initiated coverage with a BUY rating and a $1.10 target price on Calgary-based Westleaf with the prospects its continued store expansions will generate “meaningful” revenues through 2020. (As of writing, Westleaf’s stock price closed at $0.55.)
With the easing of the national cannabis supply bottleneck, and retailers soon being able to offer edibles with higher price points and margins, the expectation is demand will shift from the illicit market to legal stores. Eight Capital is bullish on Westleaf because of the company’s unique branding strategies, amid restrictive marketing regulations, is seen potentially increasing its brand awareness and generate higher revenue streams with its growing retail chain.
Westleaf is viewed to be well funded to launch between 30-50 stores across Canada through the end of 2020, depending on how many licences it obtains, and it could secure additional revenue streams through high-quality cannabis sales.
Westleaf’s “Prairie Records” unique retail chain set to expand
In January, the company acquired cannabis retailer Canndara Canada Inc., which gave it control over 50 potential retail locations in Canada. Today, Westleaf’s “Prairie Records” retail chain operates in Saskatchewan, a dispensary brand concept that offers cannabis while blending in a record store atmosphere.
“We believe Westleaf’s Prairie Records store concept allows for increased brand awareness and consumer engagement in an environment where product branding/advertising is highly restrictive,” Eight Capital’s report reads.
Westleaf is targeting high-traffic, prime locations to continue rolling out its Prairie Record stores in B.C., Alberta, Saskatchewan and Manitoba where it will be able to operate an e-commerce operation as well. (It also began operating e-commerce sales in March in Saskatchewan.) In Alberta, Eight Capital believes the easing of restrictions will help Westleaf acquire more licenses where it already holds 29 municipal development permits.
“The thesis [is] that in Canada, specifically, retail distribution is one of the most important components of the entire value chain. Our thesis is that it’s through wholly owning retail distribution that we get the best opportunity to control the consumer shopping experience and ultimately help shape and influence their purchasing habits to buy our products and create brand equity organically.”
— Westleaf CEO Scott Hurd via Cannabis Business Times
Westleaf’s vertical integration offers increased value
Hurd said Westleaf is also one of the few vertically integrated cannabis companies in the Canadian industry that is also developing assets across the entire value chain. From cultivation to large-scale processing, extraction, and product manufacturing—with the cornerstone of its strategy wholly owning retail distribution.
Eight Capital believes the Calgary company’s processing and indoor cultivation facilitates that are expected to come online in the near future will further diversify its revenue streams with the ability to produce and sell high quality, premium cannabis and derivative products (edibles, beverages, vape pens).
Westleaf is constructing its indoor “Thunderchild” growing facility located in Battleford, Saskatchewan with an expected 130,000 square feet that will allow 14,600 kg of flower production per year.
As the edible market opens up, processing capabilities will be more important and Westleaf acquired “The Plant” from Delta 9 in January that will allow it to process and extract 65,000 kg of cannabis per year by the end of 2019 along with conducting R&D. Westleaf is expanding the facility to 60,000 square feet to increase the capacity for white labeling products and producing distillate for third parties, to diversify its revenue stream.
The Calgary licensed producer is also teaming up with Colorado-based processing company Xabis Inc. who will offer its expertise at “The Plant.” Xabis has developed more than 200 products, including edibles, beverages, extracts and topicals for eight years in the more mature Colorado cannabis market.
Westleaf’s strategy of diversifying in formulating unique, high quality derivative products is why Eight Capital expects will give it a leg up competition not only on the manufacturing side, but it will be able to offer these products in its one-of-a-kind retail chain.
Eight Capital believes the company is well funded, with $27 million in cash on hand and undrawn credit of $32 million, to expand its operations at its two new facilities to tap into the edibles market and roll out the projected stores over the next 12 months.
In addition, Eight Capital expects with a few strong quarters of strong top-line results will draw in more investors to Westleaf and expand its valuation and market value. Investors today have been more focused on LPs and cultivation than the retail sector, but Eight Capital thinks Westleaf will be at the forefront of causing this to change.
Disclosure: Directors of Mugglehead own shares of Westleaf and Westleaf is an advertiser on this website.