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Cannabis Wheaton Income Corp. May Be the Most Underrated Marijuana Company
Cannabis Wheaton could be ready to take off
Cannabis Wheaton Income Corp. (CBWTF) hasn't been getting much respect in the cannabis sector, although it did break up starting in the early part of December 2017, temporarily pushing past the $2.00 per share mark.
Other than a couple of brief surges to break the $1.00 per share mark since April 10, 2017, it hasn't been able to sustainably find support above $1.00 until December. Even now it has fallen back to under $1.50 per share, even with over 15 long-term royalty deals in place.
The primary reason I see for it not being rewarded for the visible revenue streams and the enormous amount of cannabis supply it represents, is the deals are expenses on the front end, which has kept the value of the company down because they won't contribute to the top and bottom lines until the financed projects are operational.
Once they do start coming on line, I think Cannabis Wheaton is going to soar in value and its share price because as of the royalty deals it has under its belt now, it represents the largest cannabis supplier in North America.
Its business model
Cannabis Wheaton has a similar business model as Wheaton Precious Metals, with the obvious exception of the sector it competes in. That means it requires a different set of skills and deals to generate a potential profit for the company and its shareholders.
Since the cannabis industry, in many circles, still has a negative taint attached to it, most traditional lending institutions are reluctant to lend money to companies competing in the sector, even when it's legal to do so.
That means capital is scarce for those looking for financing, which is the sweet spot for Cannabis Wheaton and the market it serves. In return for financing, the company gets marijuana delivered to it by the partners they licensed with at below market rates. It'll make the bulk of its money by selling the pot at current market prices at a discounted cost.
The weakness of the model is the lag time between initial investment via financing and the time it takes its partners to ramp up production. Once output starts to jump, I believe the share price of Cannabis Wheaton is going to soar.
Based upon the current deals in place, Cannabis Wheaton should have costs of approximately $2 per gram. It will easily be able to sell that for over $6 per gram, and probably higher than that. It wouldn't surprise me to see it climb over $7 by the middle of 2018.
But even at a modest cost of $6 per gram, it would mean a rate of return of 60 percent on its existing deals. That's hefty EBITDA.
As for the amount of cannabis the company has under its control, it has an annual total of 230,000 kilograms it will be able to sell, starting in 2019.
That has to be taken with the caveat not all of its partners will be able to deliver on their expectations. To offset that possibility the other side of the coin is more deals will be made before that time period, helping to mitigate that particular risk.
With geographic diversification and decentralization, Cannabis Wheaton is unlikely to experience any surprises that will crush its future narrative. It may falter with a couple of deals, but it will have enough of a cushion to still deliver strong results once production is in full swing from its partners.
Adding further to its geographic and product diversification, the company moved beyond North America to South American with its agreement with Inversell S.A. That deal is a direct play in the hemp segment of the cannabis market.
Wheaton Licensing Program
Cannabis Wheaton announced in September 2017 it was launching a new program called Wheaton Licensing, designed to aid prospective cannabis producers in navigating the complex application process to be licensed producers and sellers in Canada.
Hugo Alves, President of Cannabis Wheaton, said this:
"Establishing Wheaton Licensing is a way for us to help these entrepreneurs succeed in achieving their goals while facilitating our participation in these great opportunities. The goal is to cultivate these companies to be investment-ready and form the next cohort of Cannabis Wheaton streaming partners. In a way, Wheaton Licensing is the future of Cannabis Wheaton."
What has a lot of potential in this is Cannabis Wheaton getting a first look at companies and management teams it deems have a lot of long-term viability.
While competitors may get a chance to compete, it does very effectively shrink competition at the financing level by building strong relationships from the beginning of the start-up process through financing an operation.
The company should be able to skim the cream of the crop off the top and leave less desirable operations for its competitors to fight over.
When Alves asserting it "is the future of Cannabis Wheaton," he's referring primarily to securing supply streams that can meet growing market demand for many years. Providing licensing services is a means to the greater end of finding quality talent it can count on for royalty revenue for a prolonged period of time.
The risk associated with that is the ability of Cannabis Wheaton to accurately identify those entrepreneurs with the ability to execute on their business plans. If you follow the success rate of venture capitalists, you know this isn't as easy to do as it may sound; although the fact the company is competing in one specific industry will help it to boost its potential success rate in my view. The expertise Cannabis Wheaton has should also increase the number of successful businesses it decides to finance It has already worked with over 100 companies that have applied to go through the licensing process.
Over the next three years, I consider Cannabis Wheaton to be a cannabis stock that investors can set and forget. I'm surprised it's trading so low with the visible income stream it has, and the potential to rapidly increase its supply base beyond the hefty 230,000 grams a year it has under its current royalty deals.
Even if a couple of those don't work out and the supply drops to about 200,000 grams annually, it will still generate a lot of high-margin revenue for the company.
I don't see that happening without it being offset by more deals, but it's possible it could extend the period of time it takes for Cannabis Wheaton gets the full impact of the deals on its performance.
As its main competitors stand, meaning current production outlooks with their current supply potential, Cannabis Wheaton has more supply than any of them.
It's not going to take long before the market starts to take notice of Cannabis Wheaton and starts bidding up its share price based upon the visible supply under its control.
I would think in terms of holding the company for at least a couple of years, even if the market decides to wait until revenue from its contracted deals starts to come in before taking larger positions in the stock. Once it takes off, interested investors will have to start chasing it upward.
At the current entry point, it's hard to see how it won't reward patient investors with some serious returns over time. It's only going to get better before it starts to level off.