The Green Organic Dutchman Q1 2019 Earnings – Discount Looking Harder to Ignore

Bottom Line

The Green Organic Dutchman [stock_market_widget type="inline" template="generic" color="default" assets="TGOD" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] has piqued our interest lately.

Now that permitting problems are in the rearview mirror and the company is on the eve of significant organic cannabis sales to the general public, the stock looks to have some strong catalysts ahead.

We’ve always noticed the company for its significant valuation discount to peers, but have been wary of the stock due to greenhouse permitting issues and questions around its ability to cultivate organic cannabis.

Now that permitting problems are in the rearview mirror and the company is on the eve of significant organic cannabis sales to the general public, the stock looks to have some strong catalysts ahead.

With a strong cash position and the potential for group leading margins as one of the few organic producers, we see TGOD as a stock to watch.

This is one of the only cannabis stocks where everything doesn’t need to go right to still justify a higher share price.

If management can execute on their plans, the current stock price may look like a bargain a few quarters from now.

2020 Estimated EV/EBITDA

Source: SEDAR, Capital 10x Estimates

Operational Review

TGOD’s revenue, exclusively from their HemPoland subsidiary, increased 28% quarter over quarter to $2.4 million.

The company still has no Canadian cannabis revenues, but with a 200 customer beta trial kicking off at the end of Q1, and a newly permitted greenhouse space, revenue growth should be decent through the rest of 2019.

The company announced the second phase of their Hamilton facility (~2,000 kg additional annual production capacity) has received a Health Canada cultivation license and planting will begin in the next few weeks.

At full output, this second phase of their facility will contribute around $18 million of revenue, a 7x increase from this quarter’s $2.4 million.

They managed to reduce their operating net loss by $3.46 million, from -$18.19 million to -$14.73 million which is notable.

They are the only licensed producer to see falling operating costs quarter over quarter.

Their greenhouse construction saw significant progress with over $46.9 million in investments. The Hamilton facility is now ~66% complete according to their budgets, while development work at Valleyfield is progressing on time and on budget (~34% complete).

This suggests there are no construction delays at this point.

They still hold over $224 million of cash, cash equivalents, and restricted cash. At their current cash burn rate of ~$44 million (accounting for planned greenhouse expenses), they have just over 1.25 years of cash remaining. This is above average liquidity compared to peers.

This cash runway corresponds to when the company is likely to turn a profit, showing us management has been prudent about raising just enough capital to sustain the business, avoiding unnecessary stock dilution.

Years of Cash Left at Current Burn Rate

Source: SEDAR Filings, Capital 10x Estimates

It’s worth noting this is a conservative metric as they are expected to ramp up operations over the next year.

This will generate meaningful revenues and drive down their cash burn from operations, meaning TGOD likely has more than 1.3 years of cash runway in reality.

International Expansion Continues

Over the last two weeks, TGOD also announced two big international deals in the U.S. and Germany in Califormulations and Mediakos.

The first was an investment as a co-founder in Califormulations, a beverage development company poised to help companies prototype and scale different beverage concepts. This will serve to expedite TGOD’s move in the U.S. hemp-based CBD market through organic CBD beverages and will support a larger global beverage strategy.

The second was a distribution agreement with Mediakos UG through their European subsidiary, HemPoland. Mediakos is a German distributor with an established footprint in Germany and will serve to bring their CBD hemp brand to market. Europe is expected to show substantial demand for organic products, so we believe this is a smart international move.

These announcements fit with their previous developments in Europe, Latin America, and Jamaica and highlight their desire to be the global organic cannabis producer.

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TGOD was a market awareness client of Capital 10X.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Evan Veryard has a Bachelor's of Chemical Engineering from McGill University and a MaSc. of Chemical Engineering from RMC. He has over 6 years of research experience focusing on industrial materials. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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