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EXMceuticals Inc. - Strategy & Valuation Update

EXMceuticals (EXM) is a producer of highly refined cannabis ingredients for the pharmaceutical, medical, nutraceutical, and cosmetic industries. The company is poised to penetrate the lucrative pharmaceutical market for CBD and other regulated cannabinoids on a B2B basis in the next 12 months.

• Strategy change to focus on Portugal

  On 25th March 2020, EXM announced that, as a result of a strategic review carried out over previous months, its sole focus going forward will be on the further establishment and expansion of its Portuguese and European operations, in particular, its existing R&D operations and the planned industrial cannabis ingredients refinery near Lisbon. Development of the company’s African agriculture operations has, as a result, now been halted.

• Industrial scale refinery key to future growth

  EXM has completed the detailed planning for the fit-out of an existing industrial facility, to create a pharmaceutical-grade factory, operating at scale, certified to EU-GMP standards. First production of cannabis derived medical ingredients, including CBD, is expected around seven months following the receipt of funding for the project, with an initial refining capacity of 4,500 kg a year of pure EU-GMP end-product. The detailed factory design includes the potential for a fourfold capacity rise. EXM estimates c.US$15 million is needed to complete the refinery to the required standard and operate it for one year.

• CBD markets continue to grow and present huge opportunity

  EXM has chosen Portugal as its base partly due to the highly favourable regulatory regime and location, from which it can serve both the European and North American markets. Analysts at Brightfield Group predict that the European CBD market (including e-cigarette fluids) will rise from €373 million in 2019 to €1.5 billion by 2023, with the global market expected to be worth €14.4 billion by 2025. Other analysts project far higher numbers. The global medical cannabis market size was US$16.5 billion in 2019 and is expected to reach a value of US$56.5 billion by 2025, exhibiting a CAGR of 22.8% during 2020-2025.

• DCF analysis suggests huge value creation opportunity

  Our analysis shows that EXM’s business model is potentially highly profitable, with net profit margins of 35% achievable once initial production levels are achieved. Assuming equity funds are raised (at the current share price of CAD$0.22) to fund the refinery we calculate a post-money price per share of CAD$0.958, representing upside of 336%. However, our per share valuation would be vastly improved should any funds be raised via debt, up to CAD$2.50 per share assuming 100% debt. We update coverage of EXMceuticals with a stance of Conviction Buy.