• Ted Ohashi

There's a lot to like about Sunniva (CSE:SNN)

QUESTION: “What is the outlook for Sunniva?”

From A.E., in Canada

ANSWER: I am as optimistic as ever about the investment prospects for Sunniva (CSE: SNN). Just in case you haven’t noticed, the stock market is beginning to share my enthusiasm. For example, last week Sunniva was the top performer in The Cannabis Report Model Portfolio which I run. It posted a one week gain of +46.5% closing at $4.57 per share. It has been a long time since we saw such a positive week for SNN but I don’t think it’s over. I suggest it’s just beginning.

Of course, I can only make such a statement if there is a reason for the change and I think this is it. Management’s commitment to vertical integration in the California market is starting to bear fruit. Here is what I always ask myself when a recommendation of mine goes down as far as SNN did. If I just discovered Sunniva, would I recommend it today? The answer at each step of the way including today in answering your question is “YES!” And because the stock is as depressed as it is, my conviction is stronger than ever.

So what has changed to account for such an improvement in investor psychology? I think we were focussed too much on the big picture and not enough on the small picture. The big picture is still intact. Let’s look at California. California as an economic and cannabis industry unit is larger than Canada. In Canada, if you ask people to name the three largest cannabis companies the names that will come up most often are Canopy, Aurora and, yes, even with their problems, Aphria.

The market caps (stock market value) of these companies ranges from $2 billion to $13 billion. If you ask the same question about the leaders in California, Sunniva’s name will almost always be in the top three and in several cases will be number one. SNN’s market cap is less than $200 million. Given the big picture, what market would you rather be in and what company would you rather invest in? To me, it is and always has been, Sunniva.

So what’s the small picture? What I overlooked is that we have been in a Missouri market. In 1899, Congressman Willard Vandiver said, “I’m from Missouri, and you have got to show me.” And maybe that was Sunniva’s and my problem. We have been in a Missouri stock market. In 2014 and 2015, if a company said they were thinking of going into cannabis, their stock price went up. In 2016 and 2017, if you presented a sensible business plan for getting into cannabis, your stock price went up. In 2018, and especially as the market showed increasing signs of fatigue, investors wanted more than promises.

So investors said about Sunniva, “I appreciate your potential but what have you actually done?” The only answer, “Yeah. But look at the big picture.” The market wouldn’t or couldn’t look beyond the small picture to see the longer-term potential.

Until now. If we think of a vertically integrated cannabis company, then ground zero is cultivation, the next stage is oil extraction and the third and final stage is distribution. Instead of waiting for their grow operation to be ready, SNN established strategic partnerships with three suppliers of clean biomass. This provides input for their extraction facility which is functioning efficiently. The extracts had been inventoried pending SNN’s product launch. Sunniva has said they plan to expand their extraction capacity and having visited their operation at an early stage, I can tell you it is easier to expand than cultivation capacity.

The well anticipated bottleneck in the cannabis industry in California is distribution.

The problem is exacerbated by the ‘track and trace’ regulations instituted this year. The closing of the acquisition of LTYR completed the distribution requirement. One important matter is that LTYR is compliant with the new “track and trace” regulations in California that many former distributors are not. LTYR has fully automated sorting, weighing and packaging machines for large-scale distribution, an existing sales force and a real-time delivery platform. In addition, the company has strong management that will play an important role in SNN’s California management and it is revenue generating. SNN believes they are now in a position to sell all of their output and more.

Under this scenario, the Cathedral City grow facility fills in from behind. As output expands, it provides scalability to the entire operation by providing more biomass and profit margins rise as more of SNN grown product is used.

Looking at the biomass supply agreements, the processing potential of the extraction facility and potential sales through the distribution network, revenue in 2019 could approach $50 million in 2019. Moving forward, increased production from the California greenhouse means the ability to expand total sales and increase margins.

What I think about Sunniva hasn’t changed. If I liked it at $10, I like it even more now. But interesting enough, the market is warming up to the SNN story. As I have been explaining for almost a year, there’s a lot to like about Sunniva. This is a very good time to average your cost.

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