Introduction
Elixinol Global (OTCQX:ELLXF) is a company making strides in the CBD space. The company is based out of Australia and trades on the ASX under the symbol EXL, and in the US on the OTC markets under the symbol ELLXF. In addition to CBD products, the company also has operations in the hemp foods industry and are working on a medical marijuana division. The company is currently increasing their product lineup and expanding globally.
Elixinol’s stock price is down over 35% from the highs with the recent sell off in the industry. With experienced management, strong growth and a clearly defined road map, the company is an attractive buy into the pullback with significant upside potential.
Data by YCharts
Uniquely Positioned Business Segments
Elixinol Global operates through three distinct divisions.
The first division consists of Elixinol USA and Elixinol Japan. Elixinol USA manufactures and distributes CBD products globally, while Elixinol Japan (owned 50.5% by Elixinol Global) is one of the first CBD companies to distribute products throughout Japan. Elixinol has global ambitions for their products and already sells in 40 countries.
The second division is Hemp Foods Australia. This division sells hemp seeds, protein, oil and flour for human consumption. They also sell hemp skincare products under the brand Sativa. The company has even jumped on the meatless plant-based foods train, selling things like hemp veggie burgers.
Finally, Elixinol has set up a third division, which does not yet produce revenue, called Nunyara. This segment operates in the Australian medical cannabis space, and is awaiting regulatory approval in Australia. Elixinol purchased 60 acres of land for this division back in February. The licenses are expected to be approved some time in 2019.
Strong Management Team
A summary of some of the key management individuals can be found in Elixinol’s 2019 March/April Investor’s Update on page 7. Specifically, Elixinol’s CEO, Paul Benhaim has successfully run businesses in the hemp space for 25 years. He originally started a hemp foods company in the UK, came over to Australia, started Elixinol, and is now looking to take Elixinol’s products global.
Another notable member of Elixinol’s management is Ron Dufficy, the CFO, who has executive experience with two other publically traded Australian companies. His experience as a CFO should help Elixinol navigate a highly regulated industry.
An experienced management team that knows both the industry and how to run large public companies could be a key advantage for Elixinol. I have yet to see a company that combines both the cannabis industry experience and public company experience as well as Elixinol’s management team. This likely bodes well for Elixinol in the future.
Key Catalysts For Shareholders To Watch
Elixinol is positioned to capitalize on several upcoming catalysts that could directly impact the stock’s performance. They provided a road map for the company in their 2018 annual report outlining some of their key objectives over the next few years.
Source: Elixinol 2018 Annual Report
For their CBD products, Elixinol is focusing on expanding capacity in 2019 with a new 12,000 square foot facility in Colorado for production. They should be able to double production in 2019 from 2018. Elixinol is also revamping their website and focusing on the direct to consumer e-commerce sales channel. This should help increase margins through reduced costs and higher selling prices. Finally CBD Industry growth and global expansion should help Elixinol maintain strong growth for several years as they continue to roll out across Europe, Asia, and North America. The CBD segment of Elixinol’s business currently is the largest and most important. The potential here is enormous, but is also not without competition. Companies like Charlotte’s Web (OTC:OTCQX:CWBHF) in the U.S. will almost certainly provide a high degree of competition for customer loyalty.
Hemp Foods Australia should see continued adoption in retail stores of hemp based foods. Regulatory changes in Australia in late 2017 made these products legal in the country for human consumption. As a result, bulk and wholesale sales of Hemp products increased 201% and 44% respectively in 2018 from 2017, while direct to consumer sales decreased 57%. Overall Hemp Foods revenue increased 51% to $4.9 million in 2018. While direct to consumer has greater margins, wholesale and bulk sales have far more potential as large retailers pick up the products. I am also expecting the continued release of new hemp-based food products. As one of Australia’s largest hemp food brands, the company should see many of the major retailers acquire their products.
Finally, while Nunyara certainly has potential, it is very difficult to say exactly how much right now. If Elixinol can get regulatory approval and begin production in 2019, we may have a better idea of what this segment is capable of going forward later this year. I cannot put a value on this segment as of right now, but if management is able to get this going it has the possibility of being a major source of profits one day. The company has stated they plan to build a 5000 square meter facility on the 60 acres of land they purchased back in February. This segment for now remains highly speculative.
Financials and Profitability
Elixinol reports in Australian dollars. Elixinol grew revenue substantially in 2018, and I would expect that growth to continue in 2019. Elixinol is very close to being profitable. Their own adjusted results show profitability, and with the revenue growth in 2019, I am fully expecting positive EBITDA and Net Profit After Tax for the full 2019 year.
Source: Elixinol FY 2018 Investor Results Presentation
Elixinol has done a very solid job strengthening their balance sheet. In September 2018, they raised $40.0m to help fund growth initiatives. As of December 31, 2018 they had $42.9m in cash. The company had negative operating cash flow of $5.7 million in 2018, and negative investing cash flow of $8.5 million. This totals around $14m of cash spent in 2018. Thus with $43m left on the balance sheet, I do not expect further equity raises in the future as the company will be able to fund future growth with profits. You should be safe from dilution in this stock.
Source: Elixinol FY 2018 Investor Results Presentation
Valuation
While I often do a DCF analysis to come up with a valuation, I am not going to do that here. Cannabis and hemp/CBD companies are too unpredictable for myself to come up with reasonable forecasts. This is an industry that is sure to have it’s ups and downs, some of which will not be seen coming. It is also difficult to predict the exact growth of an individual company in this space. There will be winners and losers. For these reasons I will simply look at a comparative analysis of Elixinol using Charlotte’s Web and CV Sciences (OTC:OTCQB:CVSI).
Data by YCharts
Each of these three companies is currently trading right around 5 times 2019 expected sales. For companies growing revenue close to 100% per year, and about to turn profitable, I personally do not think they are overvalued. What’s interesting is that Elixinol trades at just 2.1 times book value, less than half of Charlotte’s Web. This is likely partially due to Elixinol’s $80.4m of intangible assets. Taking these out in the chart below (tangible book value) tells a different story. While CV Sciences is relatively quite high, Elixinol comes in a little below Charlotte’s Web.
Data by YCharts
I am not including a P/E ratio comparison as none of companies are all that profitable yet. It may be interesting to re-examine P/E ratios in one year when all these companies have reported full year 2019 results.
Conclusion
Elixinol has plenty of potential, yet remains a small company. At a market cap of around $400m there is substantial upside if the company executes on it’s key catalysts. The current valuation is quite reasonable as well. The valuation is very similar to another one of my favourite CBD companies, Charlotte’s Web. Elixinol is on the verge of profitability, and with over $40m cash on the balance sheet, they should be able fund future expansions with a mix of existing cash and future profits. Elixinol’s price per share is down to around $2.70, a decline of over 35% from the high of $4.25 back in April. This puts the stock at a fairly attractive long entry point. I have begun purchasing shares into this pullback and will likely purchase more. In my opinion, this is a company with potential to be one of the largest in the space, and I do not want to miss out on it.
Disclosure: I am/we are long ELLXF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have bought ELLXF shares in the last few days and will likely add more to my position soon. I am long CWBHF. I have no position and no plans to establish a long or short position in CVSI.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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