Sol Global Q4 2018 Earnings – An Undervalued Play on Cannabis Deal Making

The Bottom Line on SOL Global

In 2018 the management team of SOL Global Investments () established themselves as some of the best dealmakers in global cannabis.

When you look through some of the negative headlines that plagued the company in December, due to their past relationship with Aphria, SOL is a cannabis investment vehicle with a stellar track record and a global portfolio.

SOL trades at a 32% discount to its net asset value (NAV).

Sol’s recent investment in Verano Holdings, a multi-state operator, sets them up to be one of the leaders in U.S. Cannabis.

Most importantly for us, SOL trades at a 32% discount to its net asset value (NAV), offering meaningful upside if the stock trades at only the book value of its investments.

With the value of cannabis assets continuing to appreciate on the open market, it is likely that SOL’s book value is meaningfully understated, offering further upside to NAV when assets are monetized.

SOL Net Asset Value

Net Working Capital$ 85 million *
Private Investments at Cost$ 210 million
Tax Liability$ (20) million
Net Assets$ 275 million
Diluted Shares65 million
Net Asset Value Per Share$4.26
Current Share Price$3.22
% Upside to NAV32%

*Net working capital includes $37 million of proceeds from the exercise of warrants. Dilution from warrants is included in diluted share count. Source: SOL Global & Capital 10X Estimates

With management’s track record of generating investment gains and their recent expansions into U.S. cannabis, U.S. CBD and the European Cannabis market, SOL is looking like an interesting value at these levels.

Gain on Sale of LATAM to Aphria

LATAM Cost$93
Realized Gain$219
Unrealized Gain$23
Total Gain$242
Return on Investment159%

Source: SOL Global & Capital 10X Estimates

Operational Review

Sol was busy in the quarter spending a big chunk of the $219 million generated by selling 90% of their Aphria shares.

The company invested C$116 million into Verano Holdings, a U.S. cannabis operator with a seven-state footprint and plans to expand into seven more states by the end of 2019.

Sol also formed a new U.S. subsidiary to focus on sourcing, processing, and retailing CBD-based wellness products.

The subsidiary, Heavenly Rx is going to pay C$40 million for a majority of Bluhen Botanicals, a hemp consumer products company based out of Tennesee.

Sol also invested C$13.3 million for an 8% stake in a cannabis seed and genetics company DNA Genetics to help them with sourcing of strains and genetic research.

Lastly, SOL spent C$2.3 million for 25% stake in a vertically integrate cannabis producer seeking a license in Ireland.

Liquidity

Sol has C$30 million of cash and holds Aphria shares it could sell for another C$23 million on demand, for a total of C$53 million.

This is enough cash for another year and a half of operations at the current burn rate giving the company adequate liquidity.

In addition, Verano Holdings is soon to list on the CSE exchange providing further liquidity for SOL should it choose to sell down its stake in Verano subsequent to a public listing.

In the interest of full disclosure, Capital 10X employees’ own shares in Sol.

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
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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