A pair of analysts with Ubika Alpha are bullish on Nextleaf Solutions Ltd (CSE:OILS) (OTCMKTS:OILFF), arguing that the Canadian cannabis extraction company is “ready to be a cash-flowing machine” and tagging it again with a Buy rating and a one-year target price of $1.75.
Progress achieved at Nextleaf’s production facility in the second half of 2019 “points to” a stronger production run, Patrick Smith and Christopher Bednarz wrote in a note to investors on December 23.
The two Ubika analysts came away impressed from a recent inspection of Nextleaf Labs Ltd. in Coquitlam, British Columbia. Its processing equipment has arrived, the skid system is nearing completion and its management expects production to start shortly.
READ: Nextleaf Solutions takes aim at infused beverages and edibles with its patented cannabis extraction technology
Smith and Bednarz also argue that Nextleaf’s share price weakness over the past few months has been driven by a sector-wide selling correction. “Companies with strong fundamentals were affected regardless of what segment of the cannabis market they were insulated in,” Smith and Bednarz noted.
Processors like Nextleaf are also set to benefit from the fact that cutbacks across the industry’s largest cultivators should result in a significant increase in third-party processing needs. A shift to the outdoor growing of cannabis would also benefit third-party processors like NextLeaf.
Another advantage won recently is Nextleaf’s licensing of its none-core IP to a British Columbia-based cannabis processing equipment distribution company. Nextleaf will receive a 20% royalty of the licensee’s gross revenue and this could amount to over $3 million in royalty fees in 2020.
In other news that works in its favor, Nextleaf Solutions recently entered into an agreement to consolidate Nextleaf labs to streamline its operation and processes. Also, Nextleaf’s current capacity suggests its white-label vaping business could theoretically support $127 million in revenue over time and $14 million to $15 million in annualized revenue over the next three years.
“With regard to profitability, given Nextleaf’s ability to produce low-cost oil, we believe the company has the potential to undercut most processors in price by achieving a high single-digit ($7-$9) per cartridge break-even price,” said Smith and Bednarz. “Overall, we believe there is plenty of room for Nextleaf to beat our white-label estimates over the next 12 months.”
Another point Smith and Bednarz stressed is that any weakness in Nextleaf’s share price since receiving its processing license last year is “not fundamentally justified”.
Nextleaf is a cannabis-extraction technology company that has a patented process for the commercial-scale production of high-quality cannabinoid distillate, a precursor to cannabis-infused products.
Nextleaf provides processing to licensed cultivators, and supplies cannabis oil and extracts to qualified Canadian and international B2B partners under their own brand. NextLeaf delivers its proprietary technology at both its centralized processing facility in Vancouver, BC and via mobile extraction lab at licensed production facilities.
Nextleaf shares jumped 1.5% to close at C$0.34 on Tuesday.